March 11, 2021

Limited Liability Companies

Limited Liability Companies

The Limited Liability Company: A Study of the Emerging Entity
      Robert R. Keatinge, Larry E. Ribstein, Susan Pace Hamill, Michael L. Gravelle, and Sharon Connaughton, 47(2): 375–460 (Feb. 1992)
Since 1988, when the Internal Revenue Service determined that limited liability companies would be taxed as partnerships, eight states have enacted statutes authorizing this new form of business, and many other states are considering similar legislation. This Article compares limited liability companies to other forms of business, compares the eight state statutes, discusses the tax treatment of limited liability companies, and considers some of the business applications of the new entity.

The Tax Treatment of Limited Liability Companies: Law in Search of Policy
      Daniel S. Goldberg, 50(3): 995–1017 (May 1995)
Certainty and predictability are sacrificed by the creation of tax incentives for the new and uncertain entity form known as the limited liability company. There is little rationality in suggesting replacement of corporations with limited liability companies. Yet, on April 3, 1995, the Treasury Department announced that it is considering simplifying the regulations for classifying an entity for tax purposes to allow taxpayers to treat domestic unincorporated business organizations as partnerships or associations (taxable as corporations) on an elective basis. If adopted, this proposal would have broad implications for limited liability companies, which would be treated as partnerships, unless elected otherwise, or the classification was determined by another Internal Revenue Code provision. The tax treatment of limited liability companies has broad implications for the federal revenue. To the extent a business can be conducted through a limited liability company instead of through a corporation, an entire level of tax can be avoided. This Article considers four alternative methods of classification of limited liability companies that could improve upon the Treasury's current classification test set forth in the Treasury regulations. The Article concludes that any of these four methods would be preferable to the Treasury's current method.

The Emergence of the Limited Liability Company
      Larry E. Ribstein, 51(1): 1–50 (Nov. 1995)
In the three years since the last comprehensive Article on LLCs was published in The Business Lawyer, the LLC has emerged as a significant choice for doing business. This Article discusses some of the more important issues that have arisen and trends that have evolved concerning LLCs and makes some suggestions about the possible future of LLC law.

The Uniform Limited Liability Company Act—Summary & Analysis of Key Provisions
      Carter G. Bishop, 51(1): 51–83 (Nov. 1995)
The Article presents an approach to understanding the Uniform Limited Liability Company Act's central drafting paradigms which create two different pathways to control the structure of a company. Both pathways are activated by required provisions in the articles of organization. The first concerns the specified duration of a company. In an at- will company without a specified duration, members have the right to compel the company's purchase of their interest. The second pathway concerns the management structure of a company. In a member-managed company, members have equal management rights, the power to bind the company, and their dissociation triggers a dissolution avoidance vote of the remaining members entitled to receive a majority of the company's current and future distributions. Nonmanaging members of a manager-managed company have no management rights or agency power and their dissociation does not trigger a dissolution avoidance vote where at least one manager is also a member. Other central provisions are also summarized and analyzed.

Check-the-Box and Beyond: The Future of Limited Liability Entities
      Edited by Larry E. Ribstein and Mark A. Sargent, 52(2): 605–52 (Feb. 1997)
This Symposium is an edited, hard-copy version of a national Internet symposium entitled "On-Line Symposium on the Future of Limited Liability Entities," which was conducted September 11 through 25, 1996, on the American Bar Association-sponsored LNET-LLC Internet discussion group. The principal focus of the Symposium was the impact of the new Internal Revenue Service "check-the-box" characterization rules on the choice of entity analysis and, more generally, on the future of business associations. The participants also considered, in depth, the tax, liability, securities, and bankruptcy implications of the rapid proliferation of new forms of business entities.

Limited Liability Companies in the Decade of the 1990s: Legislative and Case Law Developments and Their Implications for the Future
      Charles W. Murdock, 56(2): 499 (Feb 2001)
In many situations, the LLC is the entity of choice when choosing a form of business organization. Most of the legislative and case law developments regarding LLCs occurred in the 1990s. This Article reviews such statutory and judicial developments with particular focus upon the law of fiduciary duty. The statutory approaches in all fifty states are reviewed and critiqued, as well as the approach taken in the Uniform Limited Liability Company Act. The Illinois Act is suggested as a model.

Changed Circumstances: Eliminating the Williamson Presumption that General Partnership Interests Are Not Securities
By J. William Callison, 58(4): 1373-84 (Aug. 2003)
The last decade has witnessed vast changes in unincorporated business organization law with the advent of limited liability partnerships, limited liability limited partnerships, and limited liability companies and the adoption of new statutes, including the Revised Uniform Partnership Act, in numerous states. This Article analyzes the effect of these developments on the Williamson presumption that general partnership interests are not securities and concludes that the presumption has outlived its usefulness and should be abandoned in favor of a facts-and-circumstances approach.

Delaware Alternative Entities and the Implied Contractual Covenant of Good Faith and Fair Dealing Under Delaware Law
      Paul M. Altman and Srinivas M. Raju, 60(4): 1469—1486 (August 2005)
The Delaware Alternative Entity Statutes (i.e., the Delaware Revised Uniform Limited Partnership Act and the Delaware Limited Liability Company Act) are based upon a policy of favoring freedom of contract. Consistent with this policy, the statutes have always permitted wide latitude to the parties to an alternative entity agreement to modify the fiduciary duties of persons controlling alternative entities. In 2002, the Delaware Supreme Court in Gotham Partners L.P. v. Hallwood Realty Partners, L.P. , 817 A.2d 160 (Del. 2002), noted that the Delaware Revised Uniform Limited Partnership Act does not state that fiduciary duties can be completely eliminated. The Gotham decision created uncertainty regarding the extent to which fiduciary duties could be modified. Recent amendments to the Alternative Entity Statutes clarified that the default fiduciary duties may be expanded, restricted or eliminated by provisions in a limited partnership agreement or limited liability company agreement, provided, however, that the implied contractual covenant of good faith and fair dealing may not be eliminated. Given that the implied contractual covenant of good faith and fair dealing is now a "floor" below which a partner's or member's duties cannot be contractually eliminated, the scope of the implied covenant is of great significance to the drafters of alternative entity agreements. This article discusses the parameters of implied contractual covenant of good faith and fair dealing and its anticipated application and impact in the alternative entity arena.

Model Limited Liability Company Membership Interest Redemption Agreement
      By the Subcommittee on Limited Liability Companies of the Committee on Partnerships and Unincorporated Business Organizations, ABA Section of Business Law, 61(3):1197—1234 (May 2006)

The Next Generation: The Revised Uniform Limited Liability Company Act
      Daniel S. Kleinberger and Carter G. Bishop, 62(2): 515—552 (February 2007)

Model Real Estate Development Operating Agreement with Commentary
      Joint Task Force of Committee on LLCs, Partnerships and Unincorporated Entities and Committee on Taxation, ABA Section of Business Law, 63(2): 385–510 (February 2008)

RULLCA Section 301—The Fortunate Consequences (and Continuing Questions) of Distinguishing Apparent Agency and Decisional Authority
      Thomas E. Rutledge and Steven G. Frost, 64(1): 37-58 (November 2008)
The Revised Uniform Limited Liability Company Act ("RULLCA"), finalized in 2006, adopts a unique formulation rejecting statutory apparent agency authority on behalf of the company. Further, in the member-managed limited liability company, it separates inter se decisional authority from the ability to bind the entity. We trace the history of this development in what is now the dominant form of business organization, explain the objectives and operation of section 301 of RULLCA and its relationship to those provisions addressing inter se decisional authority, and discuss the transition issues that will be faced in a state that adopts RULLCA after having followed the traditional member-managed versus manager-managed paradigm.

Litigating in LLCs
      Larry E. Ribstein, 64(3): 739-756 (May 2009)
One of the most important issues involving limited liability companies is the appropriate way to characterize and handle disputes among members. Courts and legislatures borrowed the derivative suit remedy from corporations and limited partnerships and applied it to LLCs without adequately considering whether this application was appropriate. In fact, this remedy is not suited to the typical business associations for which LLC statutes are designed--that is, closely held firms in which members generally participate directly in management. In this setting, the derivative remedy creates costs and complications that are unnecessary because more appropriate remedies are available, including member-authorized suits on behalf of the entity, direct suits by the injured parties, and contractual arbitration. Accordingly, the derivative suit should not be a default remedy for LLCs. More generally, this analysis provides an example of the potential risks of borrowing LLC rules from other types of business associations.

Resolving LLC Member Disputes in Connecticut, Massachusetts, Pennsylvania, Wisconsin, and the Other States Which Enacted the Prototype LLC Act
      James R. Burkhard, 67(2): 405 - 434 (February 2012)
Ten states have modeled their LLC statute on the Prototype Act, prepared by a committee of the ABA Business Law Section. The Prototype Act includes unique provisions governing how LLC member disputes should be settled B intending to eliminate the need for derivative suits. The article explains the procedures, discusses interpretations of the statutory sections, and pays substantial attention to the problems which have arisen in these states when courts have applied these Prototype provisions. By analyzing the existing Prototype provisions, the article provides guidance to lawyers (and courts) litigating LLC member disputes, and recommends how states can improve their existing statutes by adopting recently proposed amendments to the Prototype Act drafted by a committee of the Business Law Section.

LLC Agreement Forms
      LLCs, Partnerships and Unincorporated Entities Committee, ABA Business Law Section, 69(3): 743-798 (May 2014)

Model Organizational Checklist for a Limited Liability Company
      Limited Liability Company Subcommittee of the LLCs, Partnerships and Unincorporated Entities Committee, ABA Business Law Section, 69(4): 1251-1321 (August 2014)

Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out?
     Peter B. Ladig and Kyle Evans Gay; 70(4): 1059-1082 (Fall 2015)
In early 2014, the then-managing members of the limited liability company (“LLC”) that owned The Philadelphia Inquirer, the Philadelphia Daily News, and filed nearly simultaneous petitions for judicial dissolution of the LLC in the Court of Common Pleas in Philadelphia and the Delaware Court of Chancery. The dual petitions created the anomaly that everyone agreed on dissolution, but no one could agree where it should take place. Both courts were asked to address a unique question: could a Pennsylvania court judicially dissolve a Delaware LLC? According to existing precedent, the answer was not so clear. This article proposes that the answer should be clear: a court cannot judicially dissolve an entity formed under the laws of another jurisdiction because dissolution is different than other judicial remedies. This approach gives full faith and credit to the legislative acts of the state of formation, but also permits the forum state to protect its own citizens by granting the remedies it feels necessary, short of dissolution.

The Post Dodd-Frank Act Evolution of the Private Fund Industry: Comparative Evidence from 2012 and 2015
     Wulf A. Kaal, 71(4): 1151-1206 (Fall 2016)
This comparative survey study examines the private fund industry’s reactions and adjustments to a rapidly evolving regulatory framework, three years after the first application of mandatory registration and disclosure rules for private fund advisers under the Dodd-Frank Act. Using two datasets (2012: N = 94; 2015: N = 69) for a population of 1267 registered investment advisers to add an historical time series perspective, the author analyzes and compares survey respondents’ short- and long-term estimations of industry effects. The data suggest that immediate and short-term concerns have given way to adaptation to the changes.

The Case Against Fiduciary Entity Veil Piercing
     Mohsen Manesh; 72(1): 61-100 (Winter 2016/2017)
The doctrine of USACafes holds that whenever a business entity (a “fiduciary entity”) exercises control over and, therefore, stands in a fiduciary position to another business entity (the “beneficiary entity”), those persons exercising control, whether directly or indirectly, over the fiduciary entity (the “controller(s)”) owe a fiduciary duty to the beneficiary entity and its owners. Focusing on control as the defining element, courts have applied this far-reaching doctrine across all statutory business forms—including corporations, limited partnerships, and limited liability companies—and through successive tiers of parent-subsidiary entity structure to assign liability to the individuals who ultimately exercise control over an entity. In this respect, USACafes enables what two prominent business law jurists have aptly described as “a particularly odd pattern of routine veil piercing.”

This article argues that USACafes is a needless doctrine that stands in conflict with other, more fundamental precepts of law and equity. Accordingly, when presented with the opportunity, the courts of Delaware and other jurisdictions should reject its holding. Instead, the law ought to respect the fiduciary entity for what it is: a legal person separate and apart from its owners and controllers. If the limited liability veil of a fiduciary entity is to be pierced, then it should be under the more rigorous legal standard that courts have traditionally applied in veil-piercing cases.

Death by Auction: Can We Do Better?

     Peter B. Ladig; 73(1): 53-84 (Winter 2017/2018)
The purpose of a business divorce is to sever the business relationship between or among the owners of the business. The most common judicial means of achieving this goal is a state dissolution statute. Most state dissolution statutes empower courts to sever the business relationship through various means. Some states even permit the entity or the other equity interests to avoid dissolution by exercising a statutory right to buy out the plaintiff’s interests. Delaware has eschewed this approach, instead providing few statutory directions or options and trusting its Court of Chancery to exercise its equitable discretion appropriately. Delaware courts historically were reluctant to dissolve operating, profitable entities, but in recent years Delaware courts have come to recognize the fallacy of forcing people to continue a business relationship that has fallen apart, and judicial dissolution is no longer the rarity it once was. A continuing problem, however, is that there is little common law guidance on how dissolution should be accomplished in a manner that is consistent with principles of Delaware law and that also recognizes the unique nature of these kinds of business divorces. In the absence of such guidance, Delaware courts default to what they know: an auction or sale process designed to attract the most number of bidders to maximize the entity’s value. This article suggests that the Court of Chancery should not consider an auction or other public sale process to be the default solution, that general principles of equity permit the Court of Chancery to grant many of the statutory remedies available in other states, and that a forced public sale should be the remedy of last resort.

Limited Liability Company Agreementfor a Delaware LLC with Protected Series
     LLCs, Partnerships and Unincorporated Entities Committee, ABA Business Law Section; 74(4): 1105-1176 (Fall 2019)

The Paradox of Delaware’s “Tools at Hand” Doctrine: An Empirical Investigation
     James D. Cox, Kenneth J. Martin, and Randall S. Thomas 75(3): 2123-2172 (Summer 2020)
Much has been written on the subject of abusive shareholder litigation. The last decade has witnessed at first an increase and then a dramatic spike in such suits, primarily suits filed in connection with mergers and acquisitions. Delaware courts are known for not just their deep experience in corporate lawsuits but as being doctrinal innovators. One such innovation occurred in Rales v. Blasband, 634 A.2d 927 (Del. 1993), establishing the “tools at hand” doctrine, whereby, before considering whether to grant a motion to dismiss, the court admonishes the shareholder to resort to inspection rights accorded by the Delaware General Corporation Law so as to gather facts necessary for the complaint to survive the pretrial motion.

The Business Lawyer—Seventy-Five Years Covering the Rise of Alternative Entities
     Donald F. Parsons, Jr., R. Jason Russell, and Koah M. Doud, 75(4): 2467-2490 (Fall 2020)
From its first article in 1946 through the emergence of LLCs in 1977 and on to the present day, The Business Lawyer has charted and helped foster the development of alternative entities and the increase in their complexity over time. This article follows the course of The Business Lawyer’s coverage of these entities, starting with a look at their history and then moving on to their continued development over the last thirty years. This article then briefly identifies a few important substantive issues in alternative entity law that have been covered by The Business Lawyer in recent decades, before considering some “hot topics” currently at issue.

LLC Default Rules Are Hazardous to Member Liquidity
     Donald J. Weidner, 76(1): 151-182 (Winter 2020-2021)
Simply by forming LLCs, entrepreneurs now unwittingly lock themselves in to perpetual entities that offer them no liquidity and present them with costly procedural obstacles to enforcing both their agreement among themselves and their statutory rights. Even in atwill LLCs that are member-managed, recent LLC acts deny members both a right to dissolve and a right to be bought out. While thus locking members in, these acts deny them standing to bring many if not most of their claims among themselves or against the firm.