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Abstract

The driving force for the decision to organize a new business venture as a limited liability company (“LLC”) is typically the desire to achieve favorable pass-through income tax treatment, while simultaneously enjoying the protection of limited liability for its owners. As noted by one court, “[t]he allure of the limited liability company is its unique ability to bring together in a single business organization the best features of all other business forms—properly structured, its owners obtain both a corporate-style liability shield and the pass-through tax benefits of a partnership.”

During the twenty-year period between 1977 and 1997, the legal and business communities in the United States experienced the passage of fifty state statutes creating LLCs. In 1977, Wyoming passed the first LLC statute, and the last state to make this statutory adoption was Hawaii in 1997.5 The climate of state statutory changes did not end with the proliferation of LLC provisions, as will be further discussed.

Now that all fifty states have adopted statutes creating LLCs, this form of business ownership should be attractive as the business structure of choice for new and existing businesses wishing to limit their personal liability and to be taxed as a partnership. As entrepreneurs make early start-up decisions regarding entity formation, they may soon realize that there are many possible forms from which they may choose. In addition to the corporation and the LLC, entrepreneurs can choose to start their business as a sole proprietorship, a general partnership, a limited partnership, or a limited liability partnership. Entrepreneurs, as well as those that advise them, should consider many factors before the entity selection is actually made by the business.

It is widely recognized that states compete for new businesses as a way of increasing state revenues. State revenues have increased due to the LLC registration fees, and some states have chosen to distinguish the LLC fee structure from that of the corporation fees structures in an attempt to increase revenues. Given the current state of the economy and budgetary cutbacks, states are considering new ways to generate revenues, including the creation of new entity formation choices.

To make the selection process somewhat more confusing, the LLC entity formation may also take the form of a “series LLC.” A series LLC statute allows for the establishment of a distinct series or cells that are internally created to form the limited liability company. Each series within the LLC entity has its own independent ownership and management, separate from the others within the same LLC entity. However, there are some uncertain legal areas involving series LLCs. An example of one area of concern is the issue of whether each unit in the series has to file a federal income tax return or whether just one return should be filed for the entire series LLC. While this article recognizes the uncertainty of the series LLC, the primary focus of this article is on the L3C entity. Is the L3C the next important and valuable label for those for-profit businesses seeking to be recognized as socially or environmentally responsible?

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