Combining Limited Liability and Transparent Taxation: Lessons From the Convergent Evolution of GmbH & Co. KGs, S Corporations, LLCs, and Other Functionally Equivalent Entities

Abstract

Tax transparent limited liability entities (TTLLEs), such as the GmbH & Co. KG in Germany, the trading trust in Australia, or the S Corporation and the LLC in the United States, can be found in many developed economies. While these entities are to a large extent functionally equivalent, their underlying legal mechanics are very different. The Article traces the convergent evolution of six TTLLEs in five jurisdictions, along three different paths, and describes central determinants of path dependencies. It demonstrates that the demand for TTLLEs is universal and that their availability reduces distortions caused by a traditional tax system. Furthermore, the Article argues that the often reviled distortive influence of tax law on the choice of business entity, which drove the evolution of TTLLEs, sparked innovations in the law of business organizations that would probably not have occurred otherwise, or only much later. Finally, the Article recommends making transparent taxation and entity taxation optionally available to all types of business entities and suggests carefully rationalizing the organizational law of TTLLEs while maintaining the diversity of forms that has evolved.