Protecting LLC Owners While Preserving LLC Flexibility

62 Pages Posted: 28 Sep 2017 Last revised: 14 Aug 2019

See all articles by Peter Molk

Peter Molk

University of Florida Levin College of Law

Date Written: September 26, 2017

Abstract

LLC statutes allow owners to restrict or completely waive standard governance protections required of other business forms. Corporate law mandatory stalwarts like fiduciary duties can be entirely eliminated in an LLC. This flexible approach has the potential to generate the most efficient governance relationships: tailored negotiation among LLC investors can produce an optimal set of governance terms that corporate law’s mandatory protections cannot. Yet when owners lack sophistication or bargaining power, contractual freedom allows for opportunistic terms that misprice capital, reduce investment, and inefficiently allocate capital across LLCs.

A series of cases involving opportunistic conduct have brought this problem to the fore. Recommendations for reform have focused on doing nothing, imposing mandatory protections, or relying on ad-hoc judicial interventions, but these solutions are each ultimately unsatisfying. I ultimately show how a model inspired by securities law’s accredited investor concept has the most promise to ensure LLCs’ continued viability as a distinct organizational form, with favorable liability and tax treatment to everyday investors and the freedom to craft unique governance relationships for sophisticated ones.

Keywords: LLC, Fiduciary Duties, Accredited Investor, Efficiency, Operating Agreement

JEL Classification: K12, K22

Suggested Citation

Molk, Peter, Protecting LLC Owners While Preserving LLC Flexibility (September 26, 2017). 51 UC Davis Law Review 2129 (2018); University of Florida Levin College of Law Research Paper No. 18-13. Available at SSRN: https://ssrn.com/abstract=3043462

Peter Molk (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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