LLCs and Corporations: A Fork in the Road in Delaware?

Abstract

As Vice Chancellor Laster explained in CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. Nov. 3, 2010): '[T]here is nothing absurd about different legal principles applying to corporations and LLCs.' This short paper argues that courts should respect the LLC as a business form distinct from corporations and that Delaware courts have taken the first step toward doing just that.

Where legislatures have decided that distinctly corporate concepts should apply to LLCs – such as allowing piercing the veil or derivative lawsuits – those wishes (obviously) should be honored by the courts. But where state LLC laws are silent, courts should carefully consider the legislative context and history, as well as the policy implications of the possible answers to the questions presented. In making such decisions, courts should put forth cogent reasons for their decisions, rather than blindly applying corporate law principles in what are seemingly analogous situations between LLCs and corporations.

The members of an LLC chose the LLC as their entity, and they should enjoy both the benefits and burdens of that choice. Where courts refuse to acknowledge the distinct nature of LLCs, the promoters' choice of entity is, at least in part, ignored. Vice Chancellor Laster respected the LLC as a form, as well as the legislature's choice of language in the Delaware LLC Act. Future courts should follow suit.