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

INTRODUCTION A revolution has occurred in the world of business organizations law.1 The limited liability company (LLC) is now undeniably the most popular form of new business entity in the United States. This is amazing, especially because for most of America's history the general partnership and the corporation dominated the business organizations' landscape. Rising from near obscurity in the 1990s, the LLC has now taken its place as the new "king-of-the-hill" among business entities, utterly dominating its closest rivals. As the research reported in this article indicates, the number of new LLCs formed in America in 2007 now outpaces the number of new corporations formed by a margin of nearly two to one.2 In several "bellwether" states,3 the numbers are even more impressive. For example, in Delaware and Colorado in 2007, over three new LLCs were formed for every one new corporation formed.4 Only four states had more new corporations formed than new LLCs in 2007;5 ten states and the District of Colubia had ratios of new LLCs to new corporations formed in excess of four to one;6 Connecticut came in with the highest, at a ratio of new LLCs to new corporations formed of 11.826 to I.7 The number of general partnerships formed each year cannot be tracked since no filing is required.8 In 2004, Professor Howard Friedman noted that general partnerships were now unlawyered transactions.9 He wrote: The LLC can replace the general partnership with a business that furnishes all of the advantages of the partnership, but also provides owners with limited liability. The general partnership has essentially disappeared as a "lawyered" business form. General partnerships that exist today are either holdovers from pre-LLC days or they are businesses entered into informally without legal advice that by default are subjected to the rules found in the Uniform Partnership Act. The once-elaborately drafted partnership agreement has gone the way of the buggy whip and slide rule. It has been replaced by the LLC operating agreement.10 That is presumably even more accurate today. Thus, one can safely assume that most general partnerships are unlawyered transactions because nearly any imaginable advantage to the general partnership form can easily be achieved in the LLC form but with the added benefit of limited liability. Given the small cost of forming and operating an LLC, this additional benefit is almost always worth more than the additional costs. In fact, this author has suggested before in his classes that the act of a lawyer forming a general partnership in most states may well amount to malpractice. Accordingly, the number of general partnerships formed by lawyers each year is presumably very small and inconsequential. Assuming that the formation of the vast majority of general partnerships occurs in unlawyered transactions, LLCs dominate general partnerships as well in terms of the numbers formed for even the simplest of business operations. Other business forms have fared no better against the LLC. While data for hybrid and newer business structures is more difficult to compile,11 the data in this Article relating to limited partnerships (LPs) demonstrate that the LLC's dominance of these entities is even more staggering. For example, the number of new LLCs formed in 2007 outpaced the number of new LPs formed in that same year by a margin of over 34 to I.12 In seventeen states, the ratio of new LLCs formed in 2007 to new domestic LPs exceeds 100 to 1. In every jurisdiction at least six new domestic LLCs were formed in 2007 for every one new LP. Such a level of dominance should be enough to nearly relegate the LP to the dustbin of history. Further, there is no other alternative entity on the horizon that shows the promise or potential to unseat the LLC as the new king of the hill. The only areas that have not been dominated by the LLC are those of publicly traded companies, companies that plan to become publicly traded companies, and non-profit entities. …