Tuesday, June 5, 2018
An LLC By Any Other Name, Is Still Not a Corporation
Earlier this week, Keith Paul Bishop observed on his blog, "Professor Joshua Fershee has been fighting the good fight on limited liability company nomenclature, but I fear that he is losing." I am not willing to concede that I am losing (yet), but I have to concede that I am winning less often than I'd hoped.
Bishop noted my "helpful checklist" from last week for those writing about LLCs, but he argues, "it may be time to give up the fight and bestow an entirely new name on LLCs that is less likely to be confused with corporations. I am still not ready to give up the fight, but it is an interesting thought, and there are some options.
One path I have proposed before that I think would help: Let Corps Be Corps: Follow-Up on Entity Tax Status. In that post, I suggested that the IRS should just stop using state-law entity designations, and thus stop having “corporate” tax treatment. I explained:
My proposal is not abolishing corporate tax . . . . Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to a particular entity. Thus, we would have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax.
Federal requirements to be eligible for the various tax status options would remain, but the entity type itself would cease to be a consideration. And we'd have to change our language to reflect that.
But maybe LLCs could be something else. A current problem is that "company" is a synonym for "corporation" in common usage. Thus, it is easy to see why a layperson would think a "limited liability company" is the same thing as a "limited liability corporation." Of course, there are lots of words that have a broad meaning in common parlance, but a narrower meaning in the legal sense, so it is not inherently problematic to expect lawyers to be able to draw such a distinction. (For example, as a 1L, we learn that assault does not include physical contact, but in general usage, there would be the assumption of contact.)
Still, what else could we use? To start, if a change were in the works, I think the "c" needs to go. Otherwise, the assumption will remain that the "c" means "corporation." Here's an initial list:
- LLA: Limited Liability Association
- LLB: Limited Liability Business
- LLE: Limited Liability Entity
- LLG: Limited Liability Group
- LLO: Limited Liability Operation
- LLV: Limited Liability Vehicle
It would not need to be, necessarily, something that says "limited liability" as long as that is conveyed. So perhaps:
- EOA: Entity Assets Only
- CLB: Capped Liability Business
- NIL: No Individual Liability
- LCI: Losses Capped (at) Investment
- ILL: Investment Limited Losses
- WYSIWYG: What You See Is What You Get
- AMY or TED: Just a name. You can assign a name to anything. We could name our entity AMY or TED. (I considered SUE, but that already has a legal meaning)
I remain committed to trying to educate people so we can keep the current regime and just get it right, but it is good to have options. I welcome alternative ideas or critiques of any of these.
Long live the LLC!
Ha! Thanks, I like that.
Posted by: Joshua Fershee | Jun 6, 2018 8:34:38 AM
If judges, presumably lawyers, are unable to distinguish that a limited liability company is not a corporation I have little faith that a change in nomenclature will have any impact. So much analogy between the corp and LLC that it seems indistinguishable.
Posted by: Tom N. | Jun 6, 2018 10:21:53 AM
Joshua--in the interim, the working nomenclature (in honor of you) will be JPF--Just Please Fix!
Posted by: Marcos Antonio Mendoza | Jun 6, 2018 8:19:13 AM