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COMPANY GOVERNANCE UNDER FLORIDA’S LIMITED LIABILITY COMPANY ACT - page 4 / 28

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FLORIDA STATE UNIVERSITY LAW REVIEW

[Vol. 30:53

ever, is a brand new product. In fact, it is unique. No other state has produced anything exactly like it. For that reason, it is worth explor- ing in some depth. Has Florida built a better organizational form, and if so, how is it better? And what does “better” mean?

For the purposes of this Article, I assume that form consumers (business people) already know they want limited liability14 and pass- through taxation. I also assume that they can get both through any one of several forms.15 While some professionals may face regulatory constraints on their choice of form (for example, lawyers may not be permitted to organize under the general corporation law),16 neverthe- less, for most form consumers, external relationships, with creditors or the government, will not drive the choice of form.

What, then, does? Why should form consumers buy, or form en- trepreneurs recommend, the Florida LLC? Or, conversely, why might they prefer to shop elsewhere? The answer to those questions, it seems to me, may lie in the governance provisions of the statute which regulate the distribution of power within businesses using

that form.17 Participants in a firm18

know that business life is uncertain and

that contingency planning is expensive and in any event only works

14. Not all business people do want limited liability. Although accounting firms have apparently converted to LLPs en masse, not all law firms have done so. The reason for that is surely not that they do not know they could. Instead, staying a full-liability partnership may serve as a signal to the market for legal services that the partners stand behind the quality of their work. It is, in effect, a bonding mechanism in a lemons market. See Charles R. O’Kelley, Jr., Opting In and Out of Fiduciary Duties In Cooperative Ventures: Refining the So-Called Coasean Contract Theory, 70 WASH. U. L.Q. 353 (1992).

15. There are still some federal tax wrinkles lurking in “check the box,” and there are also tax implications in converting from a previous form to a new one. See, e.g., Treas. Reg. § 301.7701-3(g)(1) (2001) and proposed amendments thereto. State taxes may also make a difference; for example, Florida’s intangibles tax applies to interests in an LLC but not a limited partnership. Tax law may therefore drive the choice of form at the margin, but should not affect the decision to become a Florida LLC as opposed to, say, a Delaware LLC. Filing fees may also drive choices at the margin, even when, rationally, they should not. See supra note 2.

16. While these professional restrictions strike me as somewhat silly once full shield limited liability is deemed acceptable, they do exist.

17. A sole proprietor does not have to worry about intra-firm governance unless she foresees bringing in equity participants in the future, and she can always switch forms later. I assume, therefore, that the sole proprietor’s decision to form an LLC rather than an S corporation will be made solely by reference to their relative transaction costs and tax differentials, and the advantage seems clearly to be with the LLC.

Many large corporations are also using the LLC for their wholly-owned subsidiaries. Single member LLCs are disregarded entities for tax purposes, so the parent corporation achieves de facto consolidation without having to comply with the tax regulations govern- ing consolidated returns.

In any event, it does not really matter which state’s LLC form the sole proprietor or cor- porate parent chooses unless that state is particularly prone to veil piercing. Thus, those form consumers might as well shop at home.

18. I use the word “firm” in its economic sense to describe an enterprise that requires team production. Ronald H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937), re-

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