The LLC Compared: Corporations, Partnerships, Statutory Trusts and Foreign Vehicles

Scope of the chapter. The LLC is one of several forms available to a person who wishes to conduct a business or hold property through an entity. This chapter compares it with the others: the corporation taxed under subchapter C, the corporation that has elected to be taxed under subchapter S, the general partnership and its registered variant the limited liability partnership, the limited partnership and its variant the limited liability limited partnership, the statutory trust, and the principal non-U.S. vehicles that serve similar purposes. For each form the chapter describes the state-law attributes that matter in planning, the federal tax treatment that ordinarily follows, and the settings in which the form is preferred to an LLC or the LLC to it. It closes with a method for choosing among the forms and with the means by which an entity may move from one form to another.

Why the comparison matters. Since the check-the-box regulations took effect in 1997, an LLC can be taxed as a partnership, as a corporation, as an S corporation or, if it has one owner, as a disregarded entity (see supra ¶ 150). That flexibility has made the LLC the default choice for most closely held businesses formed in the United States. It has not made the other forms obsolete. Each retains advantages in particular settings: the corporation for businesses that will seek venture capital or a public offering, or whose owners wish to qualify their shares for the exclusion of gain under I.R.C. § 1202; the limited partnership for investment funds whose sponsors and investors are accustomed to it; the statutory trust for securitizations and some real estate structures; and certain non-U.S. vehicles where the tax law of another country governs. A practitioner who recommends an LLC should be able to say why the alternatives were rejected.

Two levels of analysis. The comparison proceeds on two levels that must be kept distinct. The first is state law, or the law of the country of formation, which determines the liability of owners, the allocation of management, the transfer of interests, the remedies of creditors and the duration of the entity. The second is federal tax law, which since 1997 depends on the form only in part. An eligible entity may elect its classification, so that an LLC and a limited partnership may be taxed identically, while an LLC and a corporation that are both taxed under subchapter C may differ in every respect governed by state law. The analysis in this chapter therefore treats the choice of state-law form and the choice of tax classification as separate decisions, made together.

Organization. The chapter proceeds in nine parts:

1. the method of comparison and the attributes compared (¶ 410);
2. the corporation taxed under subchapter C (¶ 420);
3. the corporation taxed under subchapter S (¶ 430);
4. general partnerships and limited liability partnerships (¶ 440);
5. limited partnerships and limited liability limited partnerships (¶ 450);
6. statutory trusts (¶ 460);
7. non-U.S. vehicles (¶ 470);
8. the choice of entity in practice (¶ 480); and
9. conversion from one form to another (¶ 490).