CLOSE CORPORATION REMEDIES AND THE EVOLUTION OF THE CLOSELY HELD FIRM

Authors

Larry E. Ribstein, University of Illinois College of Law

Abstract

This Article discusses the coming of age of small firms in three distinct stages marked by important legal developments which reduced small firms’ contracting costs and increased their opportunity to adopt suitable agreements. In the first stage, most closely held firms were general partnerships, a form that is designed for the smallest firms.

In the second stage, the growing importance of limited liability caused many small firms to incorporate while keeping their partnership characteristics. Wilkes v. Springside Nursing Home, Inc., shows that this was an unhappy compromise that necessitated judicial intervention into the parties’ contracts. While courts and legislatures loosened the constraints on the close corporation form, this loosening did little to help firms like the nursing home in Wilkes because it required small firms to do costly planning in order to remodel the corporate form to suit their needs. The application of the corporate tax to corporate-like firms deterred firms and legislatures from taking the logical step of adopting limited liability business forms designed for partnership-type firms.

The third stage was heralded by the adoption of “check-thebox” taxation, which finally eliminated the tax constraints on small firms’ choice of business form. This change opened the floodgates for the limited liability company (LLC), which proved to be the flexible limited liability form small firms were looking for. Small firms could have the contracts they wanted without tax concerns. This reduced the need for judicial interference in the governance of closely held firms and led to the application of more contract-based judicial remedies.

The next step is up to lawyers, courts, and legislatures. Lawyers need to help their clients take advantage of the planning flexibility the law now gives them. Courts should more explicitly recognize the contractual nature of remedies for oppression and deadlock. Public and private lawmakers need to provide business people with a more complete set of standard forms.

This Article begins by discussing the small firm’s infancy as a general partnership, whose default rules suited only the very smallest firms. Part II discusses the small firm’s adolescence in the era of the close corporation, when firms had to choose between limited liability and the contractual freedom available to general partnerships. Part III discusses the small firm’s adulthood as limited liability companies, with the ability to choose from a range of standard forms and state laws. The Article then shows how this evolution of business forms has affected judicial dissolution remedies in recent LLC cases. Part V discusses the implications of potential future evolution in small firms’ contracting technology.

Recommended Citation

Larry E. Ribstein, University of Illinois College of Law, CLOSE CORPORATION REMEDIES AND THE EVOLUTION OF THE CLOSELY HELD FIRM, 33 W. New Eng. L. Rev. 531 (2011), https://digitalcommons.law.wne.edu/lawreview/vol33/iss2/11