Suffolk University Law School was founded in 1906 and is located in the heart of downtown Boston. The school is dedicated to educating students of all backgrounds and circumstances, helping them to thrive in an increasingly diverse, global and technologically dependent society. The school's Business Law & Financial Services Concentration emphasizes teaching and scholarship not only in traditional corporate structures, but also in alternative non-corporate forms of organization that are becoming the norm in small businesses, emerging high-tech industries, and financial services. Its faculty members include nationally regarded experts in limited liability company, partnership, tax, and securities regulation, including Carter G. Bishop, a reporter for four separate uniform business organization law projects sponsored by the National Conference of Commissioners on Uniform State Laws, and Jeffrey M. Lipshaw, co-author with the late Larry E. Ribstein of Unincorporated Business Entities, 4th Edition (LexisNexis, 2009).
CORPORATE LAW: LLCS, CLOSE CORPORATIONS, PARTNERSHIPS,
& OTHER PRIVATE ENTERPRISES eJOURNAL
Sponsored by: Suffolk University Law School
"Reforming REIT Taxation (Or Not)"
Houston Law Review, Vol. 53, 2015, Forthcoming
Brooklyn Law School, Legal Studies Paper No. 416
BRADLEY T. BORDEN, Brooklyn Law School
Tax law treats the income of real estate investment trusts (REITs) differently from the income of regular corporations. Income distributed by regular corporations is subject to an entity-level tax and a shareholder-level tax, while taxable income distributed by REITs is subject to tax only at the shareholder level. To qualify for that single-level of tax, REITs must hold primarily real estate assets, and their income must be primarily from such assets. After being a relatively insignificant part of the economy for the first three decades of their existence, REITs have become relevant over the last twenty years, with the market capitalization of publicly traded REITs eclipsing 5% of U.S. GDP at the end of 2014. Reports about REITs appear frequently in major media outlets, with an emphasis on corporate-tax-base erosion that results from REIT taxation. Calls for REIT reform have been answered with proposed legislation that would change various aspects of REIT taxation. Recent work in this area shows that even though REITs do erode the corporate tax base, the requirement that they distribute income and the higher tax rates of REIT shareholders offset corporate-tax-base erosion and minimize the tax-revenue effects of REIT taxation. This Article examines the history of REIT taxation and identifies Congress’s purposes for enacting REIT legislation and amending it over the years. The Article examines the criticisms of REIT taxation and analyzes REIT taxation based upon how well it accomplishes Congress’s purposes and satisfies traditional tax-policy objectives. Based up on that analysis, the Article finds that REIT taxation is benign, and it benefits the economy by helping to stabilize real estate markets. The Article then compares the REIT regime with various reform alternatives. Not surprisingly, after finding that REIT taxation is benign and beneficent, the Article concludes that maintaining the status quo is more attractive than any of the reform alternatives.
"The 'Puts' of the Company's Contract: Unlocking Unpreventable Problems of Private Ordering in Limited Liability Companies"
University of Illinois College of Business, Bureau of Economic and Business Research, Working Paper Series, Paper # 15-0100
LÉCIA VICENTE, University of Illinois College of Business
This essay applies principles of process analysis to the study of bottlenecks in the limited liability company, as a result of bargaining failures or problems of private ordering in these companies. This essay focuses on governing the operating agreement or the company’s contract of private limited liability companies (LLCs) to overcome bargaining failures deriving from changes in the ownership structure of these companies after membership interests are sold without the consent of the company’s other members. The main premise on which the governance of the company’s contract relies on boils down to one fundamental assertion. The sale of legal products ought to equal a minimum of supply and demand. In other words, from the normative viewpoint, the coordination of the supply and demand sides of legal provisions ought to be the perspective from which legal design both at the legislative and market levels is understood. Thus, managing bargaining problems in the LLC whenever there is an unconsented transfer of membership rights provides the context of this essay. The coordination of supply and demand of legal products provides the perspective. In this light, the main goal of this essay is to provide contractual mechanisms that allow the right legal products and resources to be at the right place at the right time so as to maximize these companies’ profitability and their shareholders’ wealth. The products are corporate default rules. Resources include people (members, managers or directors, officers), information, money, or a combination of all these elements.
This essay focuses on the contractual features of the LLC and their members’ freedom of contract. There is a puzzling side to the freedom of contract that the members of these companies enjoy. They are free to set the regulatory framework of the company. However, more often than not, members of these business organizations have not been able to surmount bargaining failures that come as a result of lack of commitment and social expertise on their side, particularly when mutual dependence among members and the managing board is very strong and the level of relational embeddedness is very high.
Between the pervasiveness of the lack of commitment in business organizations where trust seemingly matters, and the stickiness of the relational element, it is difficult to find a tipping point when contractual relations between corporate constituencies are about to collapse. This tipping point can be fairly illustrated with cases where members withdraw or sell their units in the company without the consent of non-transferring members. Whenever the company’s contract maintains restrictions on the transfer of membership rights, it attempts to create a mechanism of mutual dependence that makes members commit in the long run. Still, this attempt to create a mutual commitment tends to be ineffective even when this commitment was sought when the contractual framework of the business was initially designed.
Thus, from the normative point of view, this essay provides an account of operating agreements of LLCs (the agreements where the members establish the manner in which the business will be operated) that is able to accommodate the introduction of contractual clauses establishing restrictions on transfer of membership rights. I define operating agreements as the company’s contract or contracts for the governance opportunity given by legislatures. Market agents are often given a menu of rules by legislatures that they can use to elaborate their companies’ operating agreements. They can opt out of these rules. But they frequently do not.
At an initial stage of the life of the company, members think of defaults as cost-effective legal products. By providing default rules, legislatures give market agents the opportunity to adapt property rights inherent to their membership rights to the nature and purpose of the LLC. This essay looks at operating agreements and restrictions on transfer of membership rights provided therein and explores how the opportunity that members have to govern their operating agreements can be efficiently seized.
Designing mechanisms such as dissolution at will and different types of lock-in clauses, that is, clauses whose purpose is to enforce relational contracts, is meant to foster mutual dependencies in the firm, alliance portfolios and balanced power relationships in these business organizations. Here, I look at the governance of the company’s contract as a promising tool of members’ onboarding that is focused on the institutional and organizational dimensions of the company as well as on its executive dimension.
About this eJournal
Sponsored by: Suffolk University Law School
This eJournal distributes working and accepted paper abstracts related to LLCs, close corporations, partnerships, and other private enterprises. This includes the law, economics, history and policy of closely-held corporations and non-corporate firms, including partnerships, limited liability companies, limited partnerships, limited liability partnerships, joint ventures, and similar entities both in the US and around the world. Specific topics include private law matters such as governance, fiduciary duties, formation, litigation, arbitration, choice of law, exit, dissolution, transfer, creditors' rights, and limited liability. They also include public law matters such as bankruptcy, employment discrimination, securities regulation, competition law, and professional regulation. Articles may also focus on types of businesses or other relationships that commonly organize as limited liability companies, close corporations, partnerships or other unincorporated business entities, including venture capital, professional services, real estate, finance, family firms, domestic relationships and public-private enterprises.
Editor: Jeffrey M. Lipshaw, Suffolk University
To submit your research to SSRN, sign in to the SSRN User HeadQuarters, click the My Papers link on left menu and then the Start New Submission button at top of page.
If your organization is interested in increasing readership for its research by starting a Research Paper Series, or sponsoring a Subject Matter eJournal, please email: RPS@SSRN.com
Legal Scholarship Network (LSN), a division of Social Science Electronic Publishing (SSEP) and Social Science Research Network (SSRN)
CORPORATE, SECURITIES & FINANCE LAW EJOURNALS
BERNARD S. BLACK
Northwestern University - School of Law, Northwestern University - Kellogg School of Management, European Corporate Governance Institute (ECGI)
RONALD J. GILSON
Stanford Law School, Columbia Law School, European Corporate Governance Institute (ECGI)
Please contact us at the above addresses with your comments, questions or suggestions for LSN-Sub.
Corporate Law: LLCs, Close Corporations, Partnerships, & Other Private Enterprises eJournal
BARRY E. ADLER
Professor of Law, New York University School of Law
STEPHEN MARK BAINBRIDGE
William D. Warren Professor of Law, University of California, Los Angeles (UCLA) - School of Law
Augustus E. Lines Professor of Law, Yale Law School, Fellow, European Corporate Governance Institute (ECGI)
ROBERT WILLIAM HILLMAN
Fair Business Practices Professor of Law, University of California, Davis - School of Law
KIMBERLY D. KRAWIEC
Professor of Law, Duke University School of Law
William B. Graham Professor of Law, University of Chicago Law School
ROBERT H. SITKOFF
John L. Gray Professor of Law, Harvard Law School
Professor of Law, Brigham Young University - J. Reuben Clark Law School
LYNN A. STOUT
Distinguished Professor of Corporate and Business Law Jack G. Clarke Business Law, Cornell Law School - Jack G. Clarke Business Law Institute
THOMAS S. ULEN
Swanlund Chair, Director, Illinois Program in Law and Economics, University of Illinois College of Law