An LLC By Any Other Name Is Still Not A Corporation

Abstract

Business entities have their own unique characteristics. Entrepreneurs and lawyers who represent them select an entity structure based on the business’s current and projected needs. The differing needs of each business span across myriad topics such as capital requirements, taxation, employee benefits, and personal liability protection. These choices present advantages and disadvantages many of which are built into the type of entity chosen.

It is critically important that people, especially lawyers, recognize the difference between entities such as corporations and limited liability companies (LLCs). It is an egregious, nearly unforgivable, error in our view to call an LLC a “limited liability corporation.” In part, this is because lawyers should try to get things right, but it is also because conflating the two entity types can lead to unpredictable outcomes. Perhaps more important, it could lead to incorrect and unjust outcomes. A prime example lies within the veil piercing context.

Lest you think that this is not a prevalent occurrence, there are nearly 9,000 references to the phrase “limited liability corporation” in court cases. Practicing attorneys are not the only people messing this up. Judges, legislators, federal and state agency officials, and media pundits are also getting it wrong. Most recently, Justice Samuel Alito scribed an op-ed that was published in the Wall Street Journal where he misused the term. Even the TV show Jeopardy! allowed as correct the answer, “What is a limited liability corporation?,” during one episode.

Enter artificial intelligence. AI relies on information it can find, and therefore AI generators, like ChatGPT, replicate the incorrect term. With a proliferation of users and programs using ChatGPT and other AI, the use of incorrect terminology will balloon and exacerbate the problem. Perhaps one day, AI can be used to correct this problem, but that cannot happen until there is widespread understanding of the distinct nature of LLCs and a commitment to precise language when talking about them.

This article informs of the looming harms of misidentifying and conflating LLCs with corporations. Additionally, it presents a warning together with ideas on how to assist with correcting the use of incorrect terminology in all contexts surrounding LLCs.

Keywords: limited liability company, LLC, business associations, business entities, corporation, precision, limited liability, entity, veil piercing, pierce the corporate veil, jurisdiction, diversity jurisdiction, AI, artificial intelligence, chatgpt, scouts, Supreme Court, companies

JEL Classification: K20, K22, M00, M10, M14, M20, M38