Abstract
The article examines regulatory approaches to individual owner compensation that does not take the form of profit sharing in a hybrid limited liability entity in the three jurisdictions—in a limited liability company (LLC) in the USA, a limited liability partnership (LLP) in the UK (for the sake of accuracy only England will be referred to hereafter), and a small partnership with all members-individuals mandatorily in Lithuania. The comparative analysis reveals a divergence in the regulatory approaches to compensating a hybrid entity owner for the entrepreneurial efforts in small and medium-sized businesses. The most flexible regime includes the default no-compensation rule coupled with the possibility for an owner to act in a non-member capacity and it applies to an LLC in the USA under ULLCA. The Lithuanian legislation imposes the most rigid approach and prohibits a member from compensating for an additional role (either as an employee or an independent contractor) in a small partnership (save for a member–manager in a manager-managed small partnership and a member representative in a member-managed small partnership). England follows an intermediate approach and allows members of an LLP to depart from the no-compensation rule; but England will likely restrict the dual status of a member–employee in the entity. The article concludes that, although partnership principles heavily influence the owners’ role in a hybrid entity, the general ban foreseen in the Lithuanian legislation needs to be modified to allow similar freedom as a private limited liability company has to reward hybrid entity owners for their efforts in running business operations.
Similar content being viewed by others
Notes
The article compares an LLC according to the latest version of the Uniform Limited Liability Company Act (2006, with the last amendments of 2013) (hereafter ULLCA), which, as a uniform unincorporated entity law in the USA has been prepared by the National Conference of Commissioners on Uniform State Laws (NCCUSL). The original ULLCA was promulgated in 1996. See: National Conference of Commissioners on Uniform State Laws (2015c) (on ULLCA) (hereafter ULLCA with prefatory note and comments). A state legislature adopts the uniform law to become effective. For the adoption of ULLCA, see Uniform Law Commission (no date). Grossman (2015), p 320; each state regulates legal entities, including an LLC. NCCUSL promotes the enactment of uniform laws in the USA, including unincorporated entity laws. Sargent and Schwidetzky (2017), p 87; all states and the District of Columbia have adopted the LLC legislation. Callison and Sullivan (2016), p 774; the LLC statutes differ among the various states.
In the USA, all states and the District of Columbia have also enacted limited liability partnership (LLP) legislation. An LLP is not, however, a separate form of business organization. It is a form of general partnership (i.e. a registered general partnership), which, depending on the particular state, offers a full or partial liability shield for partners. The Uniform Partnership Act (hereafter UPA) as a uniform partnership law provides for limited liability protection towards all obligations of an LLP. An LLP is a device to limit automatic and vicarious partners’ personal liability. Partners’ liability in an LLP is similar to that of corporate shareholders and LLC members. Some states only allow professional firms to make use of an LLP. Some others permit all businesses to use an LLP, albeit with insurance coverage. In addition, some states allow a limited partnership to register as a limited liability limited partnership (LLLP) offering limited liability for all its partners. Liability limitation towards limited partners may be important with respect to the ‘control rule’ in states which have not eliminated the rule. See, e.g.: Hurt et al. (2017), pp 15–19, 43, 47, 53–54, 88–90, 168–171, 199–209; Hillman et al. (2016), pp 610–620; Callison and Sullivan (2016), pp 761–772; Bainbridge (2014), pp 114, 150–151; Kleinberger (2012), pp 619–631; National Conference of Commissioners on Uniform State Laws (2015a) (on UPA), Sects. 102(9), 201(b), 306(c), Art. 9; National Conference of Commissioners on Uniform State Laws (2015b) (on ULPA), Sects. 102(10), (12), 110(a), 201(b)(5), 404(c).
Limited Liability Partnerships Act 2000 (hereafter LLPA), https://www.opsi.gov.uk/acts/acts2000/ukpga_20000012_en_1#1 (accessed 22 January 2017); the LLPA came into force in 2001. Limited Liability Partnerships Regulations 2000 (SI 2001/1090) (hereafter LLP Regulations), https://www.opsi.gov.uk/si/si2001/20011090.htm (accessed 22 January 2018); Blackett-Ord and Haren (2015), p 676; the LLPA applies to England, Wales, Scotland and Northern Ireland.
The Law on Small Partnerships of the Republic of Lithuania (State News, 2012, No. 83-4333) (with further amendments and supplements) (hereafter LSP) (the law entered into forced on 1 September 2012). This article analyses a small partnership under Lithuanian law as of 1 January 2020. A small partnership in Lithuanian is mažoji bendrija with the abbreviation MB. A small partnership is a corporate entity with the limited liability of its members. Note, despite the concept of a partnership as a contractual vehicle comprising at least two parties, and the name of the legal form of a company (‘small partnership’), a small partnership may even be a single-member company.
The article uses the terms ‘an owner’ or ‘a member’ of an entity interchangeably.
See more about small partnership: Mikalonienė (2018), pp 101–122.
See more: Mikalonienė et al. (2017), pp 276–278.
According to Part 4 of Art. 7 of LSP: ‘A member of a small partnership cannot enter into employment relations with a small partnership or conclude civil contracts with it for the provision of services and the performance of works for a small partnership, except for the conclusion of a civil (service) agreement with a manager of a small partnership according to part 2 of Article 22 of this law’. Until the amendment of this Article of LSP (i.e. 14 May 2015), a small partnership could not enter into an employment agreement with its member. The scope of the current restriction is thus wider.
In Lithuania, judicial precedent as a source of law also plays a significant role. The Lithuanian Supreme Court forms uniform case law in the interpretation and application of laws in the courts of general jurisdiction and the Supreme Administrative Court—in the special (administrative) courts accordingly. Case law should be taken into account when applying the same laws. In analogous or substantially similar cases, courts are generally bound by their own case law and the lower courts are bound by the case law of higher courts [Parts 2–3 of Art. 23, Parts 2–3 of Art. 31, Part 4 of Art. 33 of the Law on the Courts of the Republic of Lithuania (State News, 1994, No. 46-851) (with further amendments and supplements)].
Ventoruzzo et al. (2015), p 144.
Lutter (1997), p 176; GmbH & Co. KG is a limited partnership with the general partner-limited liability company (GmbH) and it is treated as a hybrid structure. GmbH & Co. KG in Germany and an LLC in the USA have the same effects. Fleischer (2015), pp 7–8, 10–11; at the beginning of 2014, limited partnerships amounted to approximately 16.7% (more than 249,000) of the other types of business organizations in Germany. A limited partnership ranks after the GmbH, which exceeded 75% (more than 1.1 million) of the total amount. Most limited partnerships are GmbH & Co. KG.
E.g., González et al. (2015).
Government of the United Kingdom, Official Statistics, Companies Register Activities 2017–2018 (published 28 June 2018), https://www.gov.uk/government/publications/companies-register-activities-statistical-release-20162017/companies-register-activities-2016-2017 (accessed 6 June 2019); an LLP ranks after a private company and a private limited by guarantee (no share capital).
Statistics Lithuania, Official Statistics Portal, Number of economic entities in operation by legal form and personnel group at the beginning of the year (2019), https://osp.stat.gov.lt/ (accessed 6 June 2019); a small partnership ranks after a closed stock company which is a private limited liability company with a share capital and a single-member unlimited liability company (no share capital).
According to a default rule, a member of an LLC is only entitled to a distribution before the company’s dissolution or its winding up if the company so decides (ULLCA with prefatory note and comments, ULLCA Sect. 404(b)). In Lithuania, a small partnership’s members’ meeting has to approve annual financial statements and decide on the distribution (Part 1 of Art 26 LSP).
ULLCA with prefatory note and comments, ULCCA Sect. 407(a).
ULLCA with prefatory note and comments, ULLCA Sect. 407(b).
ULLCA with prefatory note and comments, ULLCA Sect. 407(c).
ULLCA Sect. 407(h): ‘A member is not entitled to remuneration for services performed for a member-managed limited liability company, except for reasonable compensation for services rendered in winding up the activities of the company’. ULLCA Sect. 102(4)(B): ‘“Distribution” means a transfer of money or other property from a limited liability company to a person on account of a transferable interest or in the person’s capacity as a member. The term (B) does not include amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other bona fide benefits program’.
ULLCA with prefatory note and comments, ULLCA Sect. 407(h).
ULLCA Sect. 409(h): ‘If, as permitted by subsection (f) or (i)(6) or the operating agreement, a member enters into a transaction with the limited liability company which otherwise would be prohibited by subsection (b)(2), the member’s rights and obligations arising from the transaction are the same as those of a person that is not a member’.
ULLCA with prefatory note and comments, ULLCA Sect. 409(h).
ULLCA with prefatory note and comments, ULLCA Sect. 407(h); UPA with prefatory note and comments, UPA Sect. 202(c)(3).
Uniform acts in the USA offer several types of commercial partnership models: general partnership, limited partnership as well as an LLP and an LLLP as their sub-types. A comparison can be made with a traditional (general) partnership legal form because all partners in a general partnership are considered to be active partners (UPA Sects. 301, 306(a), 401(h)). A general partner possesses the right to participate in the management and business of a partnership and the right to bind the firm towards third parties in the ordinary course of business. General partners are unlimitedly and vicariously liable for the obligations of the partnership. A limited partnership has two types of partner—at least one general partner as an active partner and one limited partner as a passive partner with a rather limited role in the management of the partnership (e.g. ULPA Sects. 302, 303, 305, 402, 404(a), 406).
UPA with prefatory note and comments, UPA Sect. 201(a).
UPA with prefatory note and comments, UPA Sect. 306(a).
Bromberg and Ribstein (2013), vol. 1, 1:43, 2:101–2:103.
UPA with prefatory note and comments, UPA Sect. 401(j). Hillman et al. (2016), p 292; historically, the no-compensation rule was adopted from British partnership law.
Callison and Sullivan (2016), pp 130, 291.
Hillman (2005), pp 809–810.
UPA with prefatory note and comments, UPA Sects. 301, 306(a), 307, 401(a),(h), 703.
Bromberg and Ribstein (2013), vol. 2, 6:50.
Hillman (2005), p 805.
UPA with prefatory note and comments, UPA Sect. 202(c)(3); for instance, there is a presumption of the existence of a partnership when there is profit sharing, unless a person is paid for services as an independent contractor or receives compensation as an employee. Callison and Sullivan (2016), pp 128–129.
UPA with prefatory note and comments, UPA Sect. 202(c)(3)(B); 1914 UPA has already provided for a partner’s dual status. According to UPA Sect. 102(4)(b), distribution ‘does not include amounts constituting reasonable compensation for present or past service’.
UPA with prefatory note and comments, UPA Sect. 202(c)(3).
Callison and Sullivan (2016), pp 144, 293; referring to Malone v. Patel, 2012 WL 1142251 (Tex. App. Houston 1st Dist. 2012). Partners in a professional partnership may agree in a partnership agreement or a separate employment contract to be remunerated for their services provided for the partnership, e.g. a management fee for managing partners.
Bromberg and Ribstein (2013), vol. 1, 2:16–2:17.
Hurt et al. (2017), pp 252–256.
Hurt et al. (2017), pp 257–258.
Drigotas (2005), p 1.
E.g., Stover and Hamill (1998–1999), p 825. In Alabama, the status of a member–non-member in an LLC, which could thus include a member–employee position, is recognised by statute. Richardson and Kalinka (2000–2001), pp 799–801, also see fn. 127; when analyzing tax issues related inter alia to an LLC, the authors refer to a member’s payments for services provided in a member capacity as a share of profits or guaranteed payments.
ULLCA Sect. 407 (c)(5); in a manager-managed LLC the termination of membership removes the person as a manager of the firm, but not vice versa.
Klein et al. (2014), pp 446–447, for a private LLC. Besides the overall tax description, it should be mentioned that the same tax treatment could apply for state tax purposes, albeit this depends on the particular state.
Sargent and Schwidetzky (2017), pp 52, 62–63, 104, 112, 121–123.
Hurt et al. (2017), pp 254–255.
Hurt et al. (2017), p 257.
The articles compare an LLP with the traditional (general) partnership. The English partnership is not a separate legal entity, while the Scottish partnership is a legal person that is distinct from its partners (see Partnership Act 1890 (hereafter PA), Art. 4, https://www.legislation.gov.uk/ukpga/Vict/53-54/39 (accessed 23 January 2018)).
Part 5 of Art. 1 of LLPA; Sects. 7-8 of LLP Regulations; Morse et al. (2017), pp 5, 8–9.
Art. 6 of LLPA; Sect. 7(3) of LLP Regulations.
Sect. 7(4) of LLP Regulations: ‘No member shall be entitled to remuneration for acting in the business or management of the limited liability partnership’.
Art. 1(1) of PA.
Art. 4(1) of PA.
Morse (2015), pp 4, 7–8.
Blackett-Ord and Haren (2015), pp 26–29, 33.
Whittaker et al. (2016), p 115.
Ibid.
Blackett-Ord and Haren (2015), pp 37, 50.
Art. 24(6) of PA.
Art. 24(1) of PA.
Art. 24(1), (5) of PA.
Arts. 9 and 12 of PA; Berry (2015), p 368.
Banks (2017), p 118.
Morse (2015), pp 78, 81–82.
Banks (2017), p 123.
Morse (2015), p 182.
Blackett-Ord and Haren (2015), p 235.
Banks (2017), pp 98–99, 118–121.
Blackett-Ord and Haren (2015), pp 37, 236.
Morse (2015), pp 75–76. The author has emphasized that a worker is not the same as an employee under English law, i.e. a worker is an intermediate category between an employee and a self-employed person.
Banks (2017), pp 121–123.
Ibid., pp 263–265.
Morse et al. (2017), pp 217, 224, 227, 234.
Morse (2015), p 342.
Morse (2015), p 342.
Berry (2017), pp 314, 323.
Whittaker et al. (2016), pp 18–19, 122.
Morse (2015), pp viii, 344.
Morse et al. (2017), p 226.
Berry (2017), p 315.
Parts 1-2 of Art. 12 of LSP.
Part 4 of Art. 7 of LSP.
Ibid.
A multi-member member-managed small partnership has to select a member representative (Part 1 of Art. 21 of LSP). The members’ meeting appoints and recalls a member representative. If the members’ meeting decides to remunerate a member representative, the meeting determines the amount of the remuneration and its means of payment (paras. 1-2 of Part 1 of Art. 14 of LSP).
Arts. 24-26 of LSP.
In Lithuania, entrepreneurs may choose between a partnership, which is a legal entity (a general partnership or a limited partnership), and a partnership as a purely contractual vehicle.
Explanatory note no. XIIP-2662 to Law No. XI-2159 of 2014, https://e-seimas.lrs.lt (accessed 31 May 2016); Decision of the Lithuanian Government approving the Conception of the Prospective Legal Regulation on Small Partnerships No. 1042 of 2011 (State News, 2011, No. 111-5226), paras. 26, 62-63.
Explanatory note no. XIIP-2662 to the Law No. XI-2159 of 2014, https://e-seimas.lrs.lt (accessed 31 May 2016).
Freedman (2001), pp 897, 899.
Berry (2017), pp 315–317, 322, 332.
Whittaker et al. (2016), pp 117, 119, 123.
Morse (2015), p 342.
Whittaker et al. (2016), p 119.
Para. 1 of Part 2 of Art. 12, Part 1 of Art. 21 of LSP.
For England: LLPA 5(1); Blackett-Ord and Haren (2015), p 688. An LLP agreement is not available to the public. For an LLP agreement to bind the LLP, it should be a party to the agreement. Whittaker et al. (2016), p 129; in England, unlike in a partnership when a partnership agreement regulates only the legal relations between the partners, an LLP agreement also covers rights and duties between the LLP and its members. For the USA: ULLCA with prefatory note and comments, ULLCA Sects. 102(10), (13), 105(a), 106; an operating agreement in an LLC governs internal affairs and binds the LLC and new members even when they have not assented thereto. An operating agreement is a private agreement rather than a public document.
Arts. 5-6, Parts 2-3 of Art. 7 of LSP.
Part 4 of Art. 26 of LSP.
Part 2 of Art. 8 of LSP.
See also Mikalonienė et al. (2017), pp 279, 401–402.
E.g., for an LLP in England see Whittaker et al. (2016), p 427.
Art. 94 of the Law on Insolvency of Legal Entities of the Republic of Lithuania (TAR, 2019, No. 10324).
In Lithuania, the minimum share capital of a closed stock company is 2500 Euros (Part 4 of Art. 2 of the Law on Stock Companies of the Republic of Lithuania (State News, 2000, No. 64-1914) (with further amendments and supplements).
References
Bainbridge SM (2014) Agency, partnerships & LLCs, 2nd edn. Foundation Press, St. Paul
Banks RCI (2002) Lindley and Banks on partnership, 18th edn. Sweet & Maxwell, London
Banks RCI (2017) Lindley and Banks on partnership, 20th edn. Sweet & Maxwell, London
Berry E (2015) Partnership options in the UK: good things come in threes. In: Hillman RW, Loewenstein MJ (eds) Research handbook on partnerships, LLCs and alternative forms of business organizations. Elgar, Cheltenham, pp 357–373
Berry E (2017) When is a partner/LLP member not a partner/LLP member? The interface with employment and worker status. Ind Law J 46(3):309–334. https://doi.org/10.1093/indlaw/dww037
Blackett-Ord M, Haren S (2015) Partnership law: the modern law of firms, limited partnerships and LLPs, 5th edn. Bloomsbury Professional, Haywards Heath
Bromberg AR, Ribstein LE (2013) Bromberg and Ribstein on partnership, vol 1. Aspen Law & Business, New York
Callison JW, Sullivan MA (2016) Partnership law and practice: general and limited partnerships, 2016–2017 edn. Thomson Reuters, Danvers
Drigotas EE (2005) Let’s look at the big picture: partnership compensation issues from the partnership and benefits perspective. In: William and Mary Annual Tax Conference 747. https://scholarship.law.wm.edu/tax/747. Accessed 22 Sept 2020
Fleischer H (2015) A guide to German company law for international lawyers—distinctive features, particularities, idiosyncrasies. In: Fleischer H et al (eds) German and Nordic perspectives on company law and capital markets law. Mohr Siebeck, Tübingen, pp 3–26
Freedman J (2001) Limited liability partnerships in the United Kingdom—do they have a role for small firms? J Corp Law 26(4):897–916
González AJV et al (eds) (2015) Private company law reform in Europe: the race for flexibility. Aranzadi, Cizur Menor
Grossman N (2015) Casual convergence in unincorporated entity law. In: Hillman RW, Loewenstein MJ (eds) Research handbook on partnerships, LLCs and alternative forms of business organizations. Elgar, Cheltenham, pp 319–335
Hillman RW (2005) Law, culture, and the lore of partnership: of entrepreneurs, accountability, and the evolving status of partners. Wake Forest Law Rev 40(3):793–826
Hillman RW et al (2016) The revised Uniform Partnership Act, 2016–2017 edn. Thomson Reuters, Danvers
Hurt C et al (2017) Bromberg and Ribstein on limited liability partnerships, the revised Uniform Partnership Act, and the Uniform Limited Partnership Act (2001), 2017th edn. Wolters Kluwer, New York
Hynes JD, Loewenstein MJ (2015) Agency, partnership, and the LLC: the law of unincorporated business enterprises; cases, materials, problems, 9th edn. LexisNexis, New Providence
Klein J et al (2014) United States. In: Jausàs A (ed) Company formation: a practical global guide, vol 2, 3rd edn. Globe Law and Business, London, pp 435–473
Kleinberger DS (2012) Agency, partnerships, and LLCs, 4th edn. Wolters Kluwer Law & Business, New York
Lutter M (1997) Limited liability companies and private companies. In: Vagts D (ed) International encyclopedia of comparative law, vol 13: business and private organizations, Part 1, Ch 2 (1972–2002). JCB Mohr, Tübingen, pp 1–199
Macey JR et al (2017) The law of business organizations: cases, materials, and problems, 13th edn. West Academic Publishing, St. Paul
McCahery JA, Vermeulen EPM (2004) The evolution of closely held business forms in Europe. In: McCahery JA et al (eds) The governance of close corporations and partnerships: US and European Perspectives. Oxford University Press, Oxford, pp 191–240
Mikalonienė L (2018) Small partnership company form as a vehicle for small and medium-sized businesses in Lithuania: is the theoretical model effective in practice? ECFR 15(1):101–122. https://doi.org/10.1515/ecfr-2018-0004
Mikalonienė L et al (2017) The convergence and divergence of legal forms of enterprises: is Lithuanian legal regulation attractive in international context? Scientific study. Vilniaus universiteto leidykla, Vilnius. https://www.tf.vu.lt/publikacijos/imoniu-teisiniu-formu-konvergencija-ir-divergencija-ar-lietuvos-teisinis-reglamentavimas-yra-patrauklus-tarptautiniame-kontekste-2017/. Accessed 22 Sept 2020
Morse G (2015) Partnership and LLP law, 8th edn. Oxford University Press, Oxford
Morse G (gen ed), Davies PL et al (eds) (2017) Palmer’s limited liability partnership law, 3rd edn. Sweet & Maxwell, London
National Conference of Commissioners on Uniform State Laws (2015a) Uniform Partnership Act (1997) (Last Amended 2013), with prefatory note and comments. 19 August 2015. https://www.uniformlaws.org/viewdocument/final-act-with-comments-118?CommunityKey=52456941-7883-47a5-91b6-d2f086d0bb44&tab=librarydocuments. Accessed 23 May 2016
National Conference of Commissioners on Uniform State Laws (2015b) Uniform Limited Partnership Act (2001) (Last Amended 2013), with prefatory note and comments. 19 August 2015. https://www.uniformlaws.org/viewdocument/final-act-with-comments-108?CommunityKey=d9036976-6c90-4951-ba81-1046c90da035&tab=librarydocuments. Accessed 23 May 2016
National Conference of Commissioners on Uniform State Laws (2015c) Uniform Limited Liability Company Act (2006) (Last Amended 2013) with prefatory note and comments. 19 August 2015. https://www.uniformlaws.org/viewdocument/final-act-with-comments-109?CommunityKey=bbea059c-6853-4f45-b69b-7ca2e49cf740&tab=librarydocuments. Accessed 23 May 2016
Oringer AL et al (2017) Dual-ing with the IRS over the employment status of partners. Tax Notes: 953-959. https://ssrn.com/abstract=2971263. Accessed 02 Mar 2018
Richardson JA, Kalinka S (2000–2001) Louisiana taxation of businesses: two alternative proposals. La Law Rev 61(4):763–804
Sargent MA, Schwidetzky WD (2017) Limited liability company handbook, 2017–2018 edn. Thomson Reuters, Danvers
Smith P (2012) Limited liability partnerships handbook, 3rd edn. Bloomsbury Professional, Haywards Heath
Stover FO, Hamill SP (1998–1999) The LLC versus LLP conundrum: advice for business contemplating the choice. Ala Law Rev 50(3):813–848
Uniform Law Commission (no date) Legislative Fact Sheet—Limited Liability Company (2006) (Last Amended 2013). https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=d4f82a69-593b-0a8e-2513-1fc79719dc56&forceDialog=0. Accessed 27 Jan 2017
Ventoruzzo M et al (2015) Comparative corporate law. West Academic Publishing, St. Paul
Vermeulen EPM (2003) The evolution of legal business forms in Europe and the United States: venture capital, joint venture and partnership structures. Kluwer Law International, The Hague
Whittaker J (consultant ed), Machell J (gen ed), Braithwaite T et al (contributors) (2016) The law of limited liability partnerships, 4th edn. Bloomsbury Professional, Haywards HeathWest Sussex
Acknowledgements
I wish to thank the Max Planck Institute for Comparative and International Private Law (Hamburg, Germany) for providing me, as a Visiting Research Fellow, with an opportunity to carry out the research and work for this article. I would also like to thank H. Michael Semler (the USA) for general advice related to the structure of the article and Karina Balasevičiūtė for assistance with proofreading the text of the article.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Mikalonienė, L. Individual Owner Compensation in a Hybrid Limited Liability Entity in a Comparative Context: LLC (the USA), LLP (the UK) and the Small Partnership (Lithuania). Eur Bus Org Law Rev 21, 915–936 (2020). https://doi.org/10.1007/s40804-020-00199-4
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40804-020-00199-4