Creatures of Contract: A Half-Truth about LLCs

Abstract

Courts reflexively describe LLCs — the nation’s most popular form of business entity — as “creatures of contract,” the contract being, of course, the LLC agreement that governs the rights and obligations of the parties that own and manage the entity. The judicial reflex to use this maxim is especially pronounced in Delaware, where today LLCs outnumber corporations by more than two to one. And because Delaware LLC law, like its corporate law, enjoys an outsized influence in the business world, courts in other jurisdictions have now predictably embraced the “creatures of contract” maxim, too.

But to describe LLCs as “creatures of contract,” while perhaps a useful shorthand, is simply misleading. LLCs are also creatures of statute. And they are also creatures of equity. This claim is not normative; it is a legal reality.

Therefore, the singular aim of this Article is to puncture the persistent fantasy that LLCs are “creatures of contract.” More accurately, this Article shows that LLCs embody a complex interaction of contract terms, statutory rules, and judge-made doctrine. Thus, LLCs are creatures of contract, statute, and equity.

Keywords: LLC, Limited Liability Company, Contract, Creature of Contract, Freedom of Contract, Fiduciary Duties, Equity

JEL Classification: K12, K22