I handled my first business divorce case in the mid 1980’s at which time, in New York and just about every other state, limited liability companies did not exist. That changed dramatically after 1988, when the IRS issued Revenue Ruling 88-76 recognizing partnership tax classification for a Wyoming LLC. Over the next decade, every other state adopted the LLC form, including New York in 1994. Since then, slowly at first but picking up in later years, there has been a marked increase in the number of business divorce matters involving LLCs. I see it in the published court decisions. I see it in the mix of my own work.
The Fordham Journal of Corporate & Financial Law recently published a fascinating statistical survey by Assistant Professor Rodney Chrisman of the Liberty University School of Law in which Professor Chrisman has compiled data from all 50 states for the years 2004-2007 showing the number of new entities being formed as LLCs, corporations and limited partnerships. The article is entitled “LLCs are the New King of the Hill: An Empirical Study of the Number of New LLCs, Corporations, and LPs Formed in the United States Between 2004-2007 and How LLCs Were Taxed for Tax Years 2002-2006,” and can be viewed here.
As the article’s title suggests, the data demonstrate that, in less than 20 years since the IRS gave the green light, LLCs overwhelmingly have become the predominant choice of business form for newly filed business entities in the United States. The data also show, however, that New York lags significantly behind in the LLC revolution. Let’s look at the numbers.
First, here’s a breakdown of new entity filings for all 50 states:
That’s a ratio of almost 3 new LLCs for each 2 new corporations. The trend in favor of LLCs is even more visible when we look at the percentages for 2007 alone:
But there’s also a dramatic disparity in the percentage of new filings among certain states. First, let’s look at the states with the highest percentage of new LLC filings (Although not in the highest group, I’m also including Delaware in this chart because of its importance as the primary jurisdictional choice for out-of-state filings.):
Now, let’s look at the bottom group which includes New York and several other, major states:
There have been reports that since 2007 the percentage of new LLC filings in Florida has surpassed the 50% mark. I also suspect that the trend remains upward for LLCs in the other states at the bottom, including New York.
But you have to wonder, why is a state as commercially important as New York lagging so far behind in the LLC movement? I can think of three reasons.
The foremost reason is New York’s publication requirement for new LLCs. As far as I know, New York is the only state in the nation that has this requirement which, particularly in the downstate areas, can cost thousands of dollars to advertise in two general circulation newspapers for six weeks. The publication law, which does not apply to regular business corporations, makes lots of money for the newspaper industry with little or no benefit to the public, which can obtain the same information for free on the New York Department of State’s website.
Second, I suspect that many lawyers steer their New York clients away from LLCs because of uncertainties and lack of appellate rulings in the case law governing the internal relations of LLC members, particularly in regard to fiduciary duties, the grounds for judicial dissolution and the availability of equitable remedies.
Third, New York’s LLC Law has not undergone any significant update for over 10 years. Compared to Delaware, where seemingly every year the legislature with the bar and bench’s support tinkers with that state’s LLC Act to improve it, the New York LLC Law is frozen in time.
If you’d like to learn more about the historical underpinnings and future of the LLC revolution, I highly recommend Professor Larry Ribstein’s new book, “The Rise of the Uncorporation”.
Update November 9, 2020: An article published in the Fall 2020 issue of The Business Lawyer cites numbers provided by the Delaware Secretary of State showing that as of year-end 2018 the number of LLCs in that state (958,734) was over triple the number of Delaware corporations (313,852).