Why Delaware LLCs?
For years, scholars have debated why parties choose to incorporate under Delaware law companies that operate businesses in other states — since different answers to this question lead to different normative assessments of the practice. Traditionally, this debate focused on public corporations and ignored private firms and non-corporate forms of business. The exploding use of limited liability companies (LLCs) instead of corporations, and the formation of LLCs under Delaware law to operate businesses outside Delaware, call for expanding this discourse to ask “Why Delaware LLCs?”. This article adds to the recent literature seeking to answer this question empirically. It critiques recent studies that looked for statistically significant correlations between state of formation choices for LLCs and differences in state LLC statutes and legal infrastructure. Finding this methodology suffers from inherent limitations, this article presents results from a different approach. I interviewed business attorneys whose clients have formed LLCs and asked them a battery of questions designed to ascertain why their clients formed LLCs in Delaware. The results of this survey provide important insights into the aspects of Delaware’s substantive LLC law and its legal infrastructure that motivate formation of Delaware LLCs, and thereby serve as an important complement to the existing statistical studies.
Agency in the Alternatives: Common-Law Perspectives on Binding the Firm
This chapter in a forthcoming book examines the external aspects of agency law in the context of unincorporated firms, that is, the capacity of actors associated a firm to bind it to the legal consequences of interactions with third parties. The chapter focuses in particular on the impact of acts done by a representative for which the representative lacked actual authority. The chapter differentiates the terminology and concepts associated with partnership law from the common law of agency, in particular, a partner's capacity to bind the firm albeit the partner lacks actual authority, which the chapter terms the partner's "positional power." Turning to LLCs, the chapter argues that basic agency issues are muddled, due in part to a historically explicable overhang of partnership concepts and terminology --- since obviated by changes in tax law --- and that the muddle most significantly (and surprisingly) affects LLCs organized under the Delaware LLC statute. The chapter demonstrates that such confusion is not inevitably and that, short of formal changes in statutory text, judicial decisions and an arguable consensus among expert lawyers may mitigate the confusion.
Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes
This Article presents the first empirical study of the domestic jurisdictional competition for trust funds. To allow donors to exploit a loophole in the federal estate tax, since 1986 a host of states have abolished the Rule Against Perpetuities as applied to interests in trust. To allow individuals to shield assets from creditors, since 1997 a handful of states have validated self-settled asset protection trusts. Based on reports to federal banking authorities, we find that, on average, through 2003 a state's abolition of the Rule increased its reported trust assets by $6 billion (a 20% increase) and increased its average trust account size by $200,000. By contrast, our assessment of validating self-settled asset protection trusts yielded indeterminate results. Our perpetuities findings imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the Rule. Interestingly, states that levied an income tax on trust funds attracted from out of state experienced no observable increase in trust business after abolishing the Rule. Because this finding implies that abolishing the Rule does not directly increase a state's tax revenue, it bears on the study of jurisdictional competition. In spite of the lack of direct tax revenue from attracting trust business, the jurisdictional competition for trust funds is patently real and intense. Our findings also speak to unresolved issues of policy concerning state property law and federal tax law.