Linking Limited Liability and Entity Taxation: A Critique of the ALI Reporters' Study on the Taxation of Private Business Enterprises

59 Pages Posted: 6 Oct 2010 Last revised: 13 Jul 2011

See all articles by Jeffrey A. Maine

Jeffrey A. Maine

University of Maine School of Law

Date Written: January 1, 2000


The American Law Institute published in 1999 a Reporters’ Study recommending mandatory conduit taxation for all private firms. This article criticizes the ALI’s approach. Specifically, the article challenges each objection the Study raised to linking limited liability and entity taxation, and recommends adoption of a tax classification rule based on the presence of limited liability.

The article begins with the historical progression of limited liability’s role in entity taxation. It explains how entity taxation arose as a necessary consequence of limited liability’s statutory development, and then argues that the original significance of limited liability gradually dissipated because the debate over entity taxation improperly focused on entity theory of corporate personality as opposed to a benefits theory of taxation. While suggesting that entity theory’s acceptance has contributed to the current disarray of entity taxation, the article notes that a limited liability based entity tax would achieve important federal policies, albeit policies different from those enunciated at the inception of entity taxation. Such a tax would equalize the economic gains that limited liability enables firms to achieve, as well as offset the social costs associated with excessive risk taking and other limited liability created overinvestment incentives. The article further explains why a classification rules based on limited liability would not necessarily penalize limited liability and discourage firms from utilizing limited liability entities.

Under the article’s proposed tax classification rule, entities offering statutory liability protection to any owner would be subject to entity taxation regardless of organizational form or non-liability characteristics. Non-limited liability vehicles would be taxed under a liberalized version of the Subchapter S conduit regime. To prevent entity taxation from discouraging socially desirable investment, the proposed tax classification rule would permit certain limited liability entities to elect conduit tax treatment.

Keywords: Limited Liability, Entity Tax, Entity Taxation, Taxation, Private Business, Private Firms, Corporate Taxation, Partnership, Corporation, Limited Liability Company, Check-The-Box, American Law Institute, ALI, Entity Classification, Tax Classification, History, Entity Theory, Corporate Personality

Suggested Citation

Maine, Jeffrey A., Linking Limited Liability and Entity Taxation: A Critique of the ALI Reporters' Study on the Taxation of Private Business Enterprises (January 1, 2000). University of Pittsburgh Law Review, Vol. 62, 2000. Available at SSRN:

Jeffrey A. Maine (Contact Author)

University of Maine School of Law ( email )

246 Deering Avenue
Portland, ME 04102
United States

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