Combining Limited Liability and Transparent Taxation: Lessons from the Convergent Evolution of GmbH & Co. KG, S Corporation, LLC and Co.

56 Pages Posted: 15 May 2017 Last revised: 2 Jun 2017

Erik Röder

Max Planck Institute for Tax Law and Public Finance

Date Written: May 15, 2017

Abstract

Tax transparent limited liability entities (TTLLEs) such as the GmbH & Co. KG in Germany, the trading trust in Australia, or the S Corporation and the LLC in the U.S., have become close to ubiquitous among developed economies. While these entities are to a large extent functionally equivalent, their underlying legal mechanics are very different. The article traces the convergent evolution of six TTLLEs in five jurisdictions along three different paths and describes central determinants of path dependencies. It demonstrates that the demand for TTLLEs is universal and that their availability reduces distortions caused by a traditional tax system. Furthermore, the article argues that the often reviled distortive influence of tax law on the choice of business entity, which drove the evolution of TTLLEs, sparked innovations in the law of business organizations that would probably not have occurred otherwise, or only much later. Finally, the article recommends making transparent taxation and entity taxation optionally available to all types of business entities, and to carefully rationalize the organizational law of TTLLEs while maintaining the diversity of forms that has evolved.

Keywords: Limited Liability, Transparent Taxation, Business entities, Entity forms, Entity rationalization, GmbH & Co. KG, LLC, LLP, S Corporation, Trading trust, SARL, société en commandite

JEL Classification: K11, K12, K15, K22, K34

Suggested Citation

Röder, Erik, Combining Limited Liability and Transparent Taxation: Lessons from the Convergent Evolution of GmbH & Co. KG, S Corporation, LLC and Co. (May 15, 2017). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2017-3. Available at SSRN: https://ssrn.com/abstract=2968296

Erik Röder (Contact Author)

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

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