Reverse Limited Liability and the Design of Business Associations

Abstract:     
The proliferation of partnership-type entities raises questions about how these entities relate to corporations and one another. It has also created strains as the use and scope of the statutes has expanded. This article discusses a particular problem that has arisen in the development of partnership-type business forms, "reverse limited liability." Reverse limited liability refers to the use of partnership-type entities as, effectively, asset-protection trusts. This has occurred because of the combination of limitations on creditors' access to debtors' interests in partnership-type firms and provisions permitting use of such firms by non-profit, one-owner entities. The courts have attempted to curtail this unexpected development with fraudulent conveyance, veil-piercing, and bankruptcy rules that do not reach the basic problem. The article suggests a statutory fix. More broadly, the advocates for a greater level of respect for the core functions of business entities and coherence of business association statutory provisions.

Accepted Paper Series