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For a Few Dollars Less: Explaining State to State Variation in Limited Liability Company Popularity

abstract The limited liability company (LLC) is a much more popular business entity in some U.S. states than in others. This empirical study provides the first detailed analysis of this phenomenon, using a partly original set of cross-sectional state-level data.

I find that formation fees, rather than taxes or substantive rules or anything else, explain the variation in LLC popularity best. Differentials between the fees for organizing an LLC and the fees for organizing a corporation explain 17% to 28% of the state-tostate variation in LLC popularity. These formation fee differentials are not very big, but they are highly visible at the moment the business entity is formed. In contrast, the data show no relationship between LLC popularity and differentials in annual fees and state entity-level taxes. I find only weak evidence that the popularity of the LLC is associated with different substantive rules contained in state LLC statutes. However, LLCs are more popular in those states whose LLC statutes expressly uphold the principle of contractual freedom and thus reassure LLC members that courts will not rewrite their contract in the event of a lawsuit. Finally, I found no evidence that LLC popularity is related to different levels of uniformity of LLC statutes, the age of LLC statutes, and other factors.

The study is available at SSRN: http://ssrn.com/abstract=1879430
   
type journal paper
   
keywords Limited liability company, LLC, closely held firm, business entities, business filings, empirical legal studies, United States
   
language English
kind of paper journal article
date of appearance 31-3-2012
journal University of Miami Business Law Review
publisher University of Miami (Miami, FL)
DOI 10.2139/ssrn.1879430
volume of journal 20
number of issue I
page(s) 1
review internal review
   
profile area LS - Business Enterprise - Law, Innovation and Risk
citation Häusermann, D. M. (2012). For a Few Dollars Less: Explaining State to State Variation in Limited Liability Company Popularity. University of Miami Business Law Review, 20(I), 1, DOI:10.2139/ssrn.1879430.