Limited Liability Companies: A Primer on Value Creation through Choice of Form

Abstract:     
Prepared for my text Corporation Law and Economics (Foundation Press forthcoming 2002), this article briefly summarizes the salient characteristics of limited liability companies. Using a transaction cost economics framework, the article explains how structuring a business as a LLC can create value. The article discusses taxation of LLCs, their organizational flexibility, and the limited liability they provide members. While transactional lawyers could provide clients with pass through taxation, relatively informal decisionmaking, restricted membership, and limited liability, they could do so only by substantially modifying the default rules governing corporate operation. From the client's perspective, extensive modifications of the default statutory rules are always problematic. Acceptable modifications must be bargained out, which is costly and may result in disagreements that prevent the relationship from ever getting off the ground. Agreed-upon modifications must be spelled out in detail to reduce the risk of future disagreements and, even if this is done, disputes over the parties' intent may nevertheless arise. By providing a set of default rules meeting these criteria, the LLC statute allows many small business relationships to adopt the statutory rules "off-the-rack."

Number of Pages in PDF File: 11

Keywords: limited liability

JEL Classification: K20

Accepted Paper Series