The Inexorable (?) Rise of the LLC

Recent decades have seen the creation of several new forms of limited liability entities that offer credible alternatives to the corporate form for nonpublic businesses. Among these “uncorporations”[1] are the limited liability partnership, the limited liability limited partnership, and, perhaps most importantly, the limited liability company (LLC).

Recent empirical research by Professor Rodney D. Chrisman confirms that the LLC has become the dominant choice of form for newly formed nonpublic business organizations. Specifically, the number of new LLCs formed in the United States in 2007 was almost twice the number of new corporations (1,375,148 LLCs versus 747,533 corporations). Interestingly, the margin in favor of the LLC was even higher in Delaware, approaching 3 to 1 in the corporate capital of the US (112,982 versus 34,144).[2]

The following table provides state-by-state data on the formation of, respectively, LLCs, corporations, and limited partnerships, between 2004 and 2007:[3]

 

State	Total 2004-2007 New LLCs		Total 2004-2007 New Corps		Total 2004-2007 New LPs
	Total	%	Total	%	Total	%
AL	57,427	71.55%	22,337	27.83%	495	0.62%
AK	7,753	70.35%	2,956	26.82%	312	2.83%
AZ	179,554	76.85%	49,571	21.22%	4,516	1.93%
AR	31,413	58.06%	22,052	40.76%	638	1.18%
CA	239,362	37.58%	381,253	59.86%	16,340	2.57%
CO	184,094	71.84%	69,919	27.29%	2,237	0.87%
CT	96,834	91.31%	8,884	8.38%	328	0.31%
DE	366,657	68.16%	135,017	25.10%	36,231	6.74%
DC	13,472	75.27%	4,032	22.53%	395	2.21%
FL	469,174	42.34%	631,550	56.99%	7,372	0.67%
GA	160,679	53.06%	138,462	45.72%	3,683	1.22%
HI	27,679	70.29%	11,279	28.64%	419	1.06%
ID	36,457	72.44%	13,210	26.25%	662	1.32%
IL	94,733	35.09%	172,348	63.84%	2,906	1.08%
IN	70,932	62.61%	41,150	36.32%	1,209	1.07%
IA	30,521	64.65%	16,375	34.68%	316	0.67%
KS	30,270	64.53%	16,174	34.48%	461	0.98%
KY	56,571	73.94%	19,166	25.05%	775	1.01%
LA	105,530	82.65%	21,371	16.74%	777	0.61%
ME	15,707	61.31%	9,758	38.09%	155	0.60%
MD	111,324	66.48%	55,423	33.10%	699	0.42%
MA	49,587	52.64%	43,427	46.10%	1,188	1.26%
MI	186,480	71.00%	75,136	28.61%	1,028	0.39%
MN	75,223	60.74%	46,811	37.80%	1,813	1.46%
MS	41,189	68.78%	17,824	29.76%	872	1.46%
MO	113,881	80.50%	25,877	18.29%	1,713	1.21%
MT	33,079	71.50%	12,958	28.01%	230	0.50%
NE	16,301	54.35%	13,383	44.62%	311	1.04%
NV	150,148	51.98%	128,921	44.63%	9,813	3.40%
NH	30,449	82.17%	6,428	17.35%	180	0.49%
NJ	206,800	72.75%	76,223	26.81%	1,253	0.44%
NM	32,330	77.55%	8,740	20.96%	619	1.48%
NY	189,610	38.02%	306,675	61.49%	2,427	0.49%
NC	117,222	58.21%	82,900	41.17%	1,257	0.62%
ND	4,895	46.55%	5,014	47.68%	607	5.77%
OH	163,060	77.19%	45,899	21.73%	2,277	1.08%
OK	56,700	68.96%	24,382	29.65%	1,143	1.39%
OR	85,045	71.67%	32,845	27.68%	775	0.65%
PA	103,840	44.51%	115,130	49.35%	14,320	6.14%
RI	14,334	64.90%	7,570	34.28%	182	0.82%
SC	84,698	79.63%	20,507	19.28%	1,163	1.09%
SD	8,174	58.59%	5,429	38.91%	348	2.49%
TN	44,838	60.98%	27,246	37.05%	1,447	1.97%
TX	225,613	51.65%	143,884	32.94%	67,331	15.41%
UT	84,800	70.38%	33,684	27.96%	2,001	1.66%
VT	12,715	74.01%	4,465	25.99%	--	--
VA	131,702	62.29%	78,237	37.00%	1,504	0.71%
WA	113,621	68.64%	50,694	30.63%	1,208	0.73%
WV	17,496	72.72%	6,379	26.52%	183	0.76%
WI	105,581	83.92%	19,420	15.44%	807	0.64%
WY	21,381	61.50%	12,918	37.16%	467	1.34%
Tot.	4,906,935	58.22%	3,321,293	39.41%	199,393	2.37%

 

In total, approximately 1.5 million more new LLCs were formed between 2004 and 2007 than were new corporations (on a cumulative national basis).

These data reflect a considerable shift away from the corporate form and towards the LLC. As recently as 2002, more new corporations were formed each year than new LLCs (on a cumulative national basis).[4]

Chrisman further relates data showing an interesting shift in taxation of LLCs:[5]

Tax Years	Sole Proprietorships		Partnerships		S-Corporations		C-Corporations
	Total	%	Total	%	Total	%	Total	%
2002-2003	76,866	53.35%	145,372	15.36%	13,856	58.14%	7,279	51.57%
2003-2004	92,460	41.85%	178,734	16.38%	25,442	67.50%	3,503	16.37%
2004-2005	146,061	46.60%	194,987	15.35%	41,602	65.90%	6,455	25.93%
2005-2006	152,869	33.27%	164,938	11.26%	43,915	41.93%	9,582	30.56%
Tot.	468,256	325.00%	684,031	72.30%	124,815	523.68%	26,819	190.02%

 

As one might expect, the vast majority of LLCs choose under the check the box regulations to be taxed as though they were sole proprietorships or partnerships. The data also show, however, that the number of LLCs electing to be taxed as S-Corporations or C-Corporations is growing at a significant rate.  This is especially true for LLCs electing to be treated as S-Corps.

Chrisman speculates that:

[P]ractitioners are beginning to see benefits to the LLC state-law form beyond merely limited liability and partnership taxation that would make them want to use an LLC even when S-Corporation or perhaps C-Corporation taxation is preferable.  For instance, the enormous flexibility and contractual nature of the LLC may provide advantages such as clearly negotiated and defined fiduciary duties and only the desired formalities.  Further, in many states, the LLC may provide asset protection that goes beyond even that provided by the corporation.[6]

On the other hand, it may be that parties are electing S-Corporation tax treatment for their LLCs for tax-driven reasons:

S-Corporation taxation is certainly less complex for most businesses than partnership taxation…. Further, S-Corporation taxation provides the opportunity for tax-free reorganization, a benefit not available to entities taxed as a partnership.  Perhaps most importantly, S-Corporation taxation allows the opportunity to avoid significant self-employment taxes as opposed to entities taxed as sole proprietorships or partnerships.[7]

In either case, the growing number of cases in which the parties elect the LLC organizational form despite choosing to be taxed as a corporation suggests that the LLC has the potential to invade areas in which most commentators thought the corporate form would remain dominant.

As someone who has devoted his professional career to the study of the corporation, and has argued the superiority of the corporate form, these data raise some interesting questions:

1. Should corporation statutes concede the nonpublic field to LLCs and focus solely on the problems of public corporations, while providing basic rules for legacy nonpublic corporations?
2. Should drafters of the Delaware and the Model Act seek to rewrite their statutes so as to provide a corporate form that can more effectively compete with the LLC to be the form of choice for all nonpublic entities? Or, in the alternative, to provide a corporate form that can more effectively compete with the LLC to be the form of choice for certain identifiable categories of nonpublic entities for which the corporate form is especially suited?

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[1] I use Larry Ribstein’s neologism as a generic encompassing all unincorporated limited liability entities. See Larry E. Ribstein, The Rise of the Uncorporation (2010), which I have found quite helpful in framing my thinking on these topics.

[2] Rodney D. Chrisman, LLCs are the New King of the Hill: An Empirical Study of the Number of New LLCs, Corporations, and LPs Formed in the United States Between 2004-2007 and How LLCs were Taxed for Tax Years 2002-2006, 15 Fordham J. Corp. & Fin. L. 459, 460 (2010). Chrisman further reports that the LLC also is displacing preexisting uncorporation forms. In 2007, for example, new LLCs were formed at a rate 34 times greater than that of new limited partnerships. Id. at 462. 

[3] The table is adapted from Chrisman, supra note 2.

[4] See Howard M. Friedman, The Silent LLC Revolution: The Social Cost of Academic Neglect, 38 Creighton L. Rev. 35, 37 (2004).

[5] The table is adapted from Chrisman, supra note 2.

[6] Chrisman, supra note 2, at 485.

[7] Id. at 488.