Academic journal article Fordham Journal of Corporate & Financial Law

The Llc as Recombinant Entity: Revisiting Fundamental Questions through the Llc Lens

Academic journal article Fordham Journal of Corporate & Financial Law

The Llc as Recombinant Entity: Revisiting Fundamental Questions through the Llc Lens

Article excerpt

ABSTRACT

Rather than being a simple hybrid, the U.S. limited liability company is better described as a recombinant entity that combines attributes of four different types of business organizations. The LLC offers an almost ineffably flexible structure, but that flexibility does not place the LLC beyond the range of traditional, formalist analysis. To the contrary, parsing the LLC in pursuit of conventional forms may allow us "to know the place for the first time." This essay uses conventional concepts to: (i) explore whether "labels matter" when LLC membership interests are described as Contract or as Property; and (ii) examine how the plight of the "bare naked assignee" relates to the LLC's status as a legal person distinct from its members.

A. Introduction

It is conventional wisdom that within the United States, "limited liability companies are a conceptual hybrid, sharing some of the characteristics of partnerships and some of corporations."131 A more accurate description is that an LLC combines attributes of four different types of business organizations: general partnerships, limited partnerships, corporations, and closely held corporations.

The "pick your partner" principle and the bifurcation of ownership interests into financial and governance rights originates in partnership law,132 while corporate law provides the complete "liability shield" i.e., the conceptual "non-conductor" that protects owners from automatic liability for the debts of the enterprise.133 The notion of management by owners as owners - which has been the blueprint for the "membermanaged" LLC - is derived from general partnership law,134 and limited partnership law provides the centralized management structure that has been the blueprint for "manager-managed" LLCs. 135 The law of "close corporations" provides the perspective for understanding the "lock in" problem that exists when the "pick your partner" principle overlaps with perpetual duration. 136

Into this mixture, the "check the box" regulations have infused a flexibility and variability of structure unprecedented in the U.S. law of business entities.137 Thus, by connotation at least, the word "hybrid" grossly understates the multifaceted and almost plastic nature of limited liability companies. Those who invented and developed LLC statutes have done more than graft the branch of one entity to the stalk of another; they have been gene splicing from among various business entities. The adjective "recombinant" is more apt than "hybrid" to describe the results.

The recombinant nature of LLCs occasions a reconsideration of fundamental questions in the law of closely held businesses, because recombination creates opportunities to view attributes in different contexts, revealing elements and consequences previously unseen or taken for granted. These opportunities in turn create an obligation to reconsider fundamental questions, because recombination necessarily transcends old forms that may have served some function.138 Those pushing the statutory development of LLCs have been and are almost exclusively transactional lawyers, who naturally seek to mold the law to facilitate the interests of their clients and their own day-to-day tasks. Galvanized by Revenue Ruling 88-76 139 and then liberated and emboldened by "check the box" statutes, they may have acted radically without fully understanding the consequences.

So, perhaps "the forms must be observed."140 To that end, this essay considers two questions:141 (1) does it matter whether the law uses the label "property" or "contract" to understand the rights in the business; and (2) is the limited liability company the apotheosis of the "separate entity" concept, and, how does the separate entity concept relate to the problem of the "bare naked assignee?"

B. PROPERTY OR CONTRACT, AND DOES THE LABEL MATTER?

At first glance, the answer to the question "Does the label matter?" must be yes. …

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