Law Commons^™

An Llc By Any Other Name Is Still Not A Corporation, Samantha J. Prince, Joshua P. Fershee

Faculty Scholarly Works

Business entities have their own unique characteristics. Entrepreneurs and lawyers who represent them select an entity structure based on the business’s current and projected needs. The different needs of each business span myriad topics such as capital requirements, taxation, employee benefits, and personal liability protection. These choices present advantages and disadvantages, many of which are built into the type of entity chosen. It is critically important that people, especially lawyers, recognize the difference between entities such as corporations and limited liability companies (LLCs). It is an egregious, nearly unforgivable, error to call an LLC a “limited liability corporation.” This is …

The Direct-Derivative Distinction, The Special Litigation Committee, And The Uniform Act: A Response To Professor Weidner, Daniel S. Kleinberger

Faculty Scholarship

The Unfortunate Role of Special Litigation Committees in LLCs has a deeply pejorative view of the Uniform Law Commission “second generation” limited liability company act, and that view extends far deeper than the target suggested by the article’s title. The article’s fundamental attack is on the distinction between direct and derivative claims; the criticisms of ULLCA’s provisions on special litigation committees depend on that attack. In support of its wide-ranging attack, The Unfortunate Role seeks to marshal history, policy, logic, and a research study pertaining to the outcome of derivative claims. Unfortunately, however, the article (i) misapprehends the drafting history …

Heads Up! Arkansas Has A New Llc Act, Carol Goforth

Arkansas Law Notes

This past legislative session Senate Bill 601, sponsored by Senator Jonathan Dismang, was enacted into law, becoming Ark. Act 1041 on April 30, 2021. This act repeals the old LLC Act and adopts the Uniform Limited Liability Company Act (“ULLCA”), with minimal changes from the uniform language. This short piece points out some basic information about the Arkansas ULLCA and some of the major changes in Arkansas law applicable to LLCs. While lawyers will obviously need to consult the new statute when actual issues arise, this article should at least provide a “heads up” notice to practitioners with LLCs or …

Protecting Llc Owners While Preserving Llc Flexibility, Peter Molk

UF Law Faculty Publications

LLC statutes allow owners to restrict or completely waive standard governance protections required of other business forms. Corporate law mandatory stalwarts like fiduciary duties can be entirely eliminated in an LLC. This flexible approach has the potential to generate the most efficient governance relationships: tailored negotiation among LLC investors can produce an optimal set of governance terms that corporate law’s mandatory protections cannot. Yet when owners lack sophistication or bargaining power, contractual freedom allows for opportunistic terms that misprice capital, reduce investment, and inefficiently allocate capital across LLCs. A series of cases involving opportunistic conduct have brought this problem to …

More Ways To Protect Llc Owners And Preserve Llc Flexibility, Peter Molk

UF Law Faculty Publications

This online companion to Protecting LLC Owners While Preserving LLC Flexibility considers several alternative approaches that might unify LLCs’ twin goals of owner protection and governance flexibility. I examine self-regulation, private certification, investor-led market forces, lawyers in their gatekeeping capacity, and mandated disclosure systems. Ultimately, each of these alternatives proves less satisfying than a system that bifurcates LLC law based on the presumed sophistication of LLC owners.

Partnership Tax Allocations: The Basics, Walter D. Schwidetzky

All Faculty Scholarship

This article endeavors to help practitioners who are not partnership tax allocation experts identify when they should consult with those with that expertise. The partnership-allocation Treasury Regulations have been called "a creation of prodigious complexity ... essentially impenetrable to all but those with the time, talent, and determination to become thoroughly prepared experts on the subject." This article is written for those, to date at least, without that time and determination. At the same time, the article provides an introduction to the partnership tax allocation rules for those contemplating making the requisite investment of time and determination.

The term "partnership," …

Don’T Dabble In Delaware, Daniel S. Kleinberger

Faculty Scholarship

When a litigator argues for a particular choice of law, the litigator seeks retrospectively the law most favorable to a particular claim or claims. When a business lawyer chooses a state of formation for a business entity, the lawyer seeks prospectively the governing law whose characteristics most favor the client’s interests.

Although in particular situations one characteristic may dominate, in general the business lawyer should look for governing law that is clear, comprehensive, coherent, accessible, and stable (or at least predictable). With these five metrics in mind, this column explains why lawyers forming limited liability companies should not dabble in …

Delineating The Implied Covenant And Providing For “Good Faith”, Daniel S. Kleinberger

Faculty Scholarship

This column considers whether an operating or partnership agreement can delineate the implied contractual obligation, comparing ULLCA and the Delaware Act, and then warns of the dangers of carelessly imposing by contract an express requirement of "good faith."

Series Of Unincorporated Business Entities: The Mobius Strip And Klein Bottle Of Business Entity Law, Daniel S. Kleinberger

Faculty Scholarship

Back in the day – say, 1990 – limited liability companies (LLCs) were the cutting edge of business entity law. Today, LLCs dominate entity formation, and the cutting edge has moved further out – to the notion of a “series,” a quasi-separate, quasi-person existing within an LLC.

Business lawyers are generally familiar with series of stocks and bonds, but those series have nothing to do with the LLC series discussed in this article. To avoid confusion, this article refers to protected series, which, as we will see, are the Mobius strips or Klein bottles of entity law.

Reflections On Teaching Business Associations: The Case For Teaching More Agency And Unincorporated Business Entity Law, Mark J. Loewenstein

Publications

This paper argues for increased coverage of the law of agency and alternative entities in business associations courses.

Aba Business Law Section, On Behalf Of Its Committees On Llcs And Nonprofit Organizations, Opposes Legislation For Low Profit Limited Liability Companies (L3cs), Daniel S. Kleinberger

Faculty Scholarship

This document comprises a letter and attachment “submitted by the ABA Business Law Section on behalf of its Committee on Limited Liability Companies, Partnerships, and Unincorporated Entities and its Committee on Nonprofit Organizations … and states our views on … a bill ‘relating to limited liability companies [and] providing for the creation and operation of low-profit limited liability companies.’” The letter and attachment “have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and should not be construed as representing the policy of the ABA.”

Supported by detailed analysis of both …

The Naked Fiduciary, Michelle M. Harner, Jamie Marincic

Faculty Scholarship

Business law is grounded in the common law of fiduciary duty. Courts and policymakers have been loath to abandon that principle. Yet, particularly in the contractual context of limited liability companies (LLCs), the fiduciary label is illusory and may undercut sound governance practices for those entities. This Article presents an in-depth empirical study about governance provisions included in LLC operating agreements and examines the implications of the data in the context of various types of businesses that might choose to organize as LLCs. The Article uses the data and related case studies to offer a new approach to LLC governance …

Now You See It, Now You Don’T: The Comings And Goings Of Disregarded Entities, Martin J. Mcmahon Jr.

UF Law Faculty Publications

While state law recognizes an LLC as a distinct type of entity, an LLC is not a distinct entity for federal tax purposes. An LLC that has two or more owners is treated as either a corporation or a partnership, while an LLC with a single owner will be disregarded for federal income tax purposes unless it elects to be treated as a corporation. In addition to single-member LLCs, the Code and Regulations recognize a second type of disregarded entity – the qualified subchapter S subsidiary (commonly called a QSub). The first part of this Article examines the tax consequences …

A Contractual Approach To Shareholder Oppression Law, Benjamin Means

Faculty Publications

According to standard law and economics, minority shareholders in closely held corporations must bargain against opportunism by controlling shareholders before investing. Put simply, you made your bed, now you must lie in it. Yet most courts offer a remedy for shareholder oppression, often premised on the notion that controlling shareholders owe fiduciary duties to the minority or must honor the minority's reasonable expectations. Thus, law and economics, the dominant mode of corporate law scholarship, appears irreconcilably opposed to minority shareholder protection, a defining feature of the existing law of close corporations.

This Article contends that a more nuanced theory of …

The Fatal Design Defects Of L3cs, Daniel S. Kleinberger

Faculty Scholarship

This article argues that the L3C is an unnecessary and unwise contrivance, and it's very existence is inherently misleading. The notion that an L3C should have privileged status under the Internal Revenue Code (known as the Code) for access to tax-exempt foundation resources is inescapably at odds with the key policies that underpin the relevant Code sections, and L3Cs are not on track-let alone on a fast track-to receive special status under the Code. An ordinary limited liability company (LLC) can perform precisely the same functions proclaimed of L3Cs. In addition, because of technical flaws, the L3C legislation adopted to …

When The Law Is Understood—L3c No, Daniel S. Kleinberger, J. William Callison

Faculty Scholarship

The November, 2009 issue of Community Dividend, included an article entitled “The L3C: A new business model for socially responsible investing.” The article spoke enthusiastically about “[t]he low-profit limited liability company, or L3C, …a newly developed form of business that blends attributes of nonprofit and for-profit organizations in order to promote investment in socially responsible objectives.”

We understand the enthusiasm; proponents of the L3C have predicted dramatic benefits. However, after careful study of the relevant law, we have concluded that the enthusiasm is misplaced. The L3C concept is fundamentally flawed, potentially dangerous, and at best counterproductive.

We also understand that …

The Single Member Limited Liability Company As Disregarded Entity: Now You See It, Now You Don’T, Daniel S. Kleinberger

Faculty Scholarship

The power and complexity of the single member limited liability company (“SMLLC”) comes from a conceptual contradiction: the conflation of owner and organization for tax purposes and the separation of owner and entity for non-tax, state law purposes. The contraction has significant practical consequences, which this article explores and illustrates, considering: • The SMLLC in federal court (single member not permitted to represent the LLC) • The IRS’s tortuous path to determining whether an SMLLC’s sole member is liable for the SMLLC’s unpaid employment taxes (yes; yes vindicated by the courts; then no, as a matter of policy) • Transfer …

The Plight Of The Bare Naked Assignee, Daniel S. Kleinberger

Faculty Scholarship

A new and separate opportunity for oppression exists because LLC law purports to (1) recognize a species of persons holding legal rights vis-á-vis the LLC (assignees) while (2) denying those persons any remedies whatsoever in connection with those rights. This article addresses the conceptual mechanics, history, and ultimate instability of that denial. The article also considers a note of irony­—namely, that the plight of the "bare naked assignee" derives from a construct, the organization as "aggregate," that LLC law has in all other respects emphatically transcended. To understand the plight of the assignee of an LLC interest, one must first …

Limited Liability Company Citizenship: Reconsidering An Illogical And Inconsistent Choice, Debra R. Cohen

Journal Articles

The trend in diversity actions in Federal Court is to rigidly apply the formalistic rules for determining citizenship (aggregate or entity) to deem limited liability companies (LLCs) to have aggregate or "partnership" citizenship. While the approach is designed to reduce the federal docket; there is no evidence that it works. More importantly, this result-oriented approach is not based on well-reasoned analysis. This approach creates several illogical and inconsistent results. It bears no reflection on modern business realities, it undermines well established principles of law, and it undercuts the purpose for which diversity jurisdiction was established, This article suggests that, just …

Direct Versus Derivative And The Law Of Limited Liability Companies, Daniel S. Kleinberger

Faculty Scholarship

The hybrid nature of limited liability companies causes us to re-invent, or at least re-examine, many doctrinal wheels. This Article will reexamine one of the most practical of those wheels-the distinction between direct and derivative claims in the context of a closely-held limited liability company.

Case law concerning the direct/derivative distinction is still overwhelmingly from the law of corporations, although LLC cases are now being reported with some frequency. LLC cases routinely analogize to, or borrow from, the corporate law. This Article encompasses that law, analyzes LLC developments, and argues that courts should (i) avoid the "special injury" rule, (ii) …

Slides: New England Forestry Foundation: Private Forests For The Public Good Since 1944, Frank Reed

Community-Owned Forests: Possibilities, Experiences, and Lessons Learned (June 16-19)

Presenter: Frank Reed, New England Forestry Foundation

9 slides

Limited Liability Companies And Estate Planning, Michael D. Larobina J.D., L.L.M.

WCBT Faculty Publications

Discusses court cases involving the use of limited liability companies as an estate planning tool in the U.S. Facts of the case of Estate of Strangi versus Commissioner; Stance of the court on the transfers made to the limited partnership; Impact of the case of Kimbell versus U.S. on the use of limited liability companies as estate planning vehicles.

Seven Points To Explain Why The Law Ought Not Allow The Elimination Of Fiduciary Duty Within Closely Held Businesses: Cardozo Is Dead; We Have Killed Him., Daniel S. Kleinberger

Faculty Scholarship

Prepared as part of the author's work as co-reporter for the Revised Uniform Limited Liability Company Act, this essay argues against legislation that empowers private agreements to eliminate fiduciary duty within a business organization. The essay considers: (i) the venerable role of fiduciary duty within business organizations and the limited predictive powers of those urging radical reform; (ii) the absence of prescience in contract drafters; (iii) the strict construction function of fiduciary law; (iv) the inevitable and inappropriate pressure that elimination would put on the obligation of good faith and fair dealing; (v) the differences in remedy available for fiduciary …

The Closely Held Business Through The Entity-Aggregate Prism, Daniel S. Kleinberger

Faculty Scholarship

When the law conceptualizes the legal form that houses a closely held business, does it matter whether the law envisages that form as an entity separate from, rather than an aggregate of, the several owners of the business? At one time, this question was at the conceptual core of the law of general partnerships, but the Revised Uniform Partnership Act supposedly put the issue to rest. Moreover, the closely held corporation is emphatically an entity, as is the predominant form of unincorporated organization - the limited liability company. Today, the entity-aggregate question might seem a mere relic of a discarded …

Charging Orders And The New Uniform Limited Partnership Act: Dispelling The Rumors Of Disaster, Daniel S. Kleinberger, Carter G. Bishop, Thomas Geu

Faculty Scholarship

Last year, an article published in this magazine focused on the charging order as "the Exclusive Remedy Against a Partnership Interest" and announced the "[s]hocking [r]evelation" that ULPA (2001)--the new Uniform Limited Partnership Act--undermines the "exclusive remedy" limitation on charging orders. The authors asserted categorically that, "from an asset protection perspective, the 2001 Act is considerably less protective of a partner's partnership interest than the 1976 Act." Elizabeth M. Schurig & Amy P. Jetel, A Charging Order Is the Exclusive Remedy Against a Partnership Interest: Fact or Fiction?, Prob. & Prop. 57, 58 (Nov./Dec. 2003).

As this article will show, …

Sorting Through The Soup: How Do Llcs, Llps And Lllps Fit Withing The Regulations And Legal Doctrines?, Daniel S. Kleinberger

Faculty Scholarship

In a children' book published in 1946, Ben Ross Berenberg described an imaginary amalgam called the churkendoose - "part chicken, turkey, duck and goose." In 1977, Wyoming invented a business law churkendoose: the limited liability company - part corporation, part general partnership, part limited partnership. That churkendoose has revolutionized the law of business organizations, becoming the vehicle of choice for tens of thousands of ventures every month and causing the IRS to radically overhaul its approach to taxing business entities. This article explores how preexisting regulatory and common law apply to LLCs and the related organizations known as limited liability …

Business Law Reform In The United States: Thinking Too Small?, Douglas C. Michael

Law Faculty Scholarly Articles

Dean Johan Henning presents the South African experience with business entity reform as one part of a coordinated whole. It included, for example, government funding for business, tax reforms, accounting and securities changes. Henning says that these reforms, though multi-faceted, had a uniform purpose: to use small business as an engine to improve the economy and to move “historically and socially disadvantaged groups” into the mainstream of the economy and the society.

These are noble goals and far reaching efforts, and a lot to ask of business entity reform. But because the South African experience was nonetheless successful by all …

Never-Ending Limitations On S Corporation Losses: The Slippery Slope Of S Corporation Debt Guarantees, Francine J. Lipman

Scholarly Works

Francine Lipman explains S corporation loss limitations in the area of shareholder guarantees, focusing on the recent tax court and seventh circuit decisions in T.F. Grojean and concludes with a summary of the lessons s corporation shareholders can learn from the Grojeans' missteps.

Revamping Veil Piercing For All Limited Liability Entities: Forcing The Common Law Doctrine Into The Statutory Age, Rebecca J. Huss

Law Faculty Publications

No abstract provided.

To Know A Veil, Douglas C. Michael

Law Faculty Scholarly Articles

Lawyers, judges, law students, and law professors have a love-hate relationship with the doctrine of “piercing the corporate veil”—the idea that shareholders might sometimes be personally liable for the debts of the corporation. It is the subject covered more than all others in courses on corporation law. It is widely litigated, being the subject of thousands of opinions. Yet, for all this attention, it is routinely vilified by the experts. Most commentators recognize that it is jurisprudence without substance.

This Article is an attempt to form a basis for rigorous analysis of virtually every veil-piercing case and to rid the …