BUSA+Limited+Liability+Companies - Limited Liability...

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Forms of Business LIMITED LIABILITY COMPANIES AND SPECIAL FORMS OF BUSINESS What does limited mean? I. Overview Business entity choices are strategic decisions based on a number of factors. These elements include choosing the best options for potential capital investment and financial growth, protection from personal liability, and tax planning. No one-entity format is ideal for all objectives. However, recent trends lead to the use of the limited liability company format as the best vehicle for providing the “best of both worlds.” Those worlds are the single-layered conduit taxation of proprietorships and partnerships with the limited personal liability accorded to shareholders of a corporation. The actual advent of limited liability companies does not begin with U.S. legal history. Many countries have allowed for the formation of limited liability companies for a long time. The limited liability company format was not used in the U.S. until the late 1970s. Why is it that it took so long for this format to catch on in the U.S.? In 1978, the Internal Revenue Service issued a Revenue Ruling with regard to a new limited liability company statute just enacted the year before in Wyoming. Under that ruling, if certain elements of the corporate format were deemed to be missing from the limited liability company format, it would be taxed as partnership and not a corporation. This tax ruling opened the virtual floodgates. Many state legislators enacted laws similar to the Wyoming statute. They wanted to attract new capital from overseas (where limited liability companies have long been accepted) and also provide an attractive legal infrastructure for start-up companies and the like. The myriad of business organization formats has grown in recent years throughout the vast majority of states. Thus, it is not surprising that there is a call for more uniformity among the states vis-à-vis the passage of laws creating limited liability companies. The group most responsible is the National Conference of Commissioners on Uniform State Laws. In 1995, this group issued the Uniform Limited Liability Company Act (U.L.L.C.A.). This act takes the traditional precedents created by agency law, the various forms of partnerships, and corporations and marries them to a cohesive set of rules for limited liability companies. The states, in turn, are free to adopt their own variations on the basic themes set out in the U.L.L.C.A. These statutes will be “adjusted” over time, experience, and court decisions. All in all, it is a most interesting time in our legal history. In many ways, we are still playing catch-up with the rest of the world. But given the vitality and ingenuity of the U.S. legal system coupled with the current economic growth in so many new start-up businesses, the horizon for this type of business format looks bright indeed. II. Hypothetical Multi-Issue Essay Question:
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This note was uploaded on 03/19/2008 for the course BUSA 2106 taught by Professor Lee during the Summer '07 term at University of Georgia Athens.

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BUSA+Limited+Liability+Companies - Limited Liability...

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