By , September 11, 2018 3:13 pm

Peter Molk, a leading LLC scholar, has published an article about LLCs.  The title, citation, and introduction of are below:

51 U.C. Davis L. Rev. 2129
U.C. Davis Law Review
June, 2018
Peter Molk
Copyright © 2018 by Peter Molk

LLC statutes allow owners to restrict or completely waive standard governance protections required of other business forms. Corporate law mandatory stalwarts like fiduciary duties can be entirely eliminated in an LLC. This flexible approach has the potential to generate maximally efficient governance relationships: tailored negotiation among LLC investors can produce an optimal set of governance terms that corporate law’s mandatory protections cannot. Yet when owners lack sophistication or bargaining power, contractual freedom allows for terms that lead to mispriced capital, reduced investment, and inefficiently allocated capital across LLCs.

A series of cases has brought this problem to the fore. Recommendations for reform have focused on doing nothing, imposing mandatory protections, or relying on ad-hoc judicial interventions, but these solutions are each ultimately unsatisfying. Instead, I show how a model inspired by securities law’s accredited investor concept has the most promise to ensure LLCs‘ continued viability as a distinct organizational form, with favorable liability and tax treatment to everyday investors and the freedom to craft unique governance relationships for sophisticated ones.

Leave a Comment