Research Handbooks in Corporate Law and Governance series
Edited by Robert W. Hillman and Mark J. Loewenstein
This book is devoted to alternative entities—primarily partnerships and limited liability companies. The partnership has been a viable form of association for centuries. The much more recent limited liability company (LLC), which traces its origins to a statute drafted by a group of Wyoming lawyers in 1977, has increasingly become the business organization of choice for new businesses in the United States. Modeled after partnership law, the purpose of the Wyoming statute was to develop a limited liability entity that would qualify for partnership taxation. Prior to the LLC, the entity of choice to achieve those goals was the limited partnership (LP). The LP was less than ideal for these purposes, however, as the general partner retained unlimited liability and the Internal Revenue Service (IRS) could scrutinize the LP’s agreements to determine whether the entity had more corporate-like characteristics than partnership-like characteristics. If it did, the IRS took the position that the entity should be taxed like a corporation; if not, the entity would be taxed like a partnership, with pass-through taxation. This IRS practice generated significant transactions costs for LPs, as promoters had to carefully craft their partnership agreements to meet the IRS tests and, to assure limited partners of pass-through taxation, retain a lawyer to render a legal opinion that the entity would be taxed as a partnership. The Wyoming LLC was successful in achieving its twin goals.