Research Handbooks in Corporate Law and Governance series
Edited by Robert W. Hillman and Mark J. Loewenstein
Chapter 7: Is the liability of limited liability entities really limited?
If you come to grief, and creditors are craving (For nothing that is planned by mortal head Is certain in this Vale of Sorrow—saving That one’s Liability is Limited) Unless there is some prohibition or other compelling reason not to, a limited liability entity (“LLE”) will be used for any activity or property ownership that may give rise to a claim against the owners of the activity or the property. Until 1988, except in the case of limited partnerships, corporate income tax treatment had been the price paid for limited liability. That year the Internal Revenue Service announced that a Wyoming limited liability company, which provided limited liability for all of its owners, would be taxed as a partnership for federal income tax purposes. Since that time, the principle of limited liability has been extended by the states to other unincorporated business organizations. Protection against liability is the most important non-tax factor in the choice of entity. In making that choice, a number of issues must be considered. Which entities are available for particular persons and for a particular enterprise? Are there differences among the LLEs in the effectiveness and extent of liability protection within a state and from state to state? Is there a difference among the LLEs in the risk that limited liability will be undermined by courts or statutes other than those statutes under which the entity is organized?
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