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ABSTRACT
The LLC is increasingly the ownership form of choice by nascent small business owners as it has some advantages over corporations and sole proprietorships and partnerships. Despite its advantages, some states have higher filing fees for LLCs than for corporations. Some states have significantly higher filing fees than other states for both LLCs and corporations. As a result, emerging companies are often discouraged from seeking liability protection, or they seek a corporation, reducing the flexibility that could be provided with an LLC. Our research shows that the disproportionate cost of starting an LLC is related to the percentage of LLCs formed in comparison with corporations. This can have significant implications to small business owners since they may be choosing ownership forms that are not advantageous to their particular venture strictly based on initial filing costs. These state policy decisions may lead to long-term tax revenue loss within states with higher filing fees.
Keywords: small business, legal entity, LLC, corporation, state fees
INTRODUCTION
The limited liability company (LLC) is a relatively new form of entity that is appealing for many small companies. Although the first LLC statute was passed in Wyoming in 1976 (Dreyer, 2003), most states did not adopt LLC regulations until the 1990s, and the last state passed enabling regulation in 1997 (Fox & Luna, 2005). LLC regulations vary state-by-state and, while attempts have been made to make consistent statutes among the 50 states with the Uniform Limited Liability Act, these attempts have failed (Kleinberger & Bishop, 2007). The LLC is generally considered to be superior to a C corporation for small business owners because of tax considerations, such as a lack of double taxation, and superior to an S corporation because of ownership flexibility considerations. LLCs do not require as many formal aspects such as establishing a Board of Directors, bylaws, or shareholder restraints. It is also considered superior to sole proprietorships and partnerships because of liability considerations (Ribstein, 2003).
Small business owners can easily access many sources of information on LLCs and corporations and these sources fall generally into one of two categories. The first category is trade books found in bookstores. These books range from an in-depth treatise on forms of ownership to a brief treatment found in...