The Limited Liability Company: A Catalyst Exposing the Corporate Integration Question

The rise of the domestic limited liability company (LLC) from obscurity to its present position as a viable, mainstream alternative to the corporation or partnership was met with enormous enthusiasm by the business community and the practicing bar. First introduced by the State of Wyoming in 1977 and recognized by the Internal Revenue Service (IRS) as a partnership for federal income tax purposes in 1988, the LLC offers for the first time a domestic entity that combines the tax advantages of a partnership with limited liability protection for all members, an advantage commonly associated with corporations. The advantages of the partnership tax provisions include one level of tax at the owner level, flexible rules to allocate profits and losses among the owners, and the opportunity for owners to deduct losses or receive distributions attributable to the partnership’s liabilities. By contrast, corporations are taxed at both the entity and the shareholder level, unless they elect subchapter S, which taxes closely held corporations only once – at the owner level – under a set of rules far less favorable and flexible than the partnership provisions. However, unlike shareholders of corporations who bear no statutory personal liability for the corporation’s debts, under the partnership statutes, at least one partner must bear personal liability for the debts and obligations of the partnership. By combining the best of both worlds, partnership taxation and limited liability, the LLC revolution can be characterized as tax driven. Nevertheless, some commentators believe that it is the LLC’s superior business provisions that will cause LLCs to continue to rise in popularity. Although the LLC’s business provisions may be characteristic of either partnerships or corporations, in toto they produce a truly unique and new business entity that cannot be aligned categorically with either of the more traditional forms. For example, the statutory provisions addressing the management and control of the LLC generally vest agency authority and governance rights in all members, as if they were partners in a general partnership. However, LLC members, unlike general partners, can adopt a management structure resembling those of corporations or limited partnerships by appointing managers. The LLC’s managers, holding the power to make important policy decisions and to bind the LLC in day-to-day business transactions, take on the roles held both by general partners of limited partnerships and by corporate directors and officers.