LLCs are not corporations

Larry Ribstein —  15 June 2011

Nor are they the redundant fictional entity, “limited liability corporations.” This is a lesson that courts and commentators are finally, slowly, learning.  I highlighted this point last fall in discussing CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. Nov. 3, 2010), where VC Laster denied a creditor standing to sue derivatively for an LLC, carefully distinguishing LLCs and corporations.  The Vice Chancellor said:

“Because the conceptual underpinnings of the corporation law and Delaware’s [alternative entity] law are different, courts should be wary of uncritically importing requirements from the DGCL into the [alternative entity] context.” Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *19 (Del. Ch. Sept. 14, 2007). 

Now Joshua Fershee teaches the same lesson in discussing CML in the Harvard Business Law Review Online:  LLCs and Corporations: A Fork in the Road in Delaware? Here’s part of the abstract:

Where legislatures have decided that distinctly corporate concepts should apply to LLCs – such as allowing piercing the veil or derivative lawsuits – those wishes (obviously) should be honored by the courts. But where state LLC laws are silent, courts should carefully consider the legislative context and history, as well as the policy implications of the possible answers to the questions presented. In making such decisions, courts should put forth cogent reasons for their decisions, rather than blindly applying corporate law principles in what are seemingly analogous situations between LLCs and corporations.

The members of an LLC chose the LLC as their entity, and they should enjoy both the benefits and burdens of that choice. Where courts refuse to acknowledge the distinct nature of LLCs, the promoters’ choice of entity is, at least in part, ignored. Vice Chancellor Laster respected the LLC as a form, as well as the legislature’s choice of language in the Delaware LLC Act. Future courts should follow suit.

Larry Ribstein

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Professor of Law, University of Illinois College of Law