Once given the option, people choose this form of organization because of it’s superiority.
I would be wary of so quickly buying into LLC as only being laws ‘permitting’ it and having ‘superiority’. If a law was passed giving particular companies subsidies of billions of dollars, you might not be surprised if the companies did well and proved their ‘superiority’, but you would be a little nonplussed at people describing the subsidies as ‘permitted’.
As I understand it, LLCs are not so much permitted as subsidized: if you wanted to form a corporation or partnership before various countries fully legalized them, you certainly could, you were indeed ‘permitted’ to form corporations; what you got, however, was also full liability—the people who made up the corporation were liable for its actions. LLCs get a subsidy in shareholders being able to shed liability and risk for their actions beyond the net worth of the LLC. This is not a free lunch, however, and it comes at the expense of everyone who has a claim against an LLC and discovers it’s bankrupt or a shell and that they can’t pierce the corporate veil.
Limited liability is not a free lunch. Being able to be sued is an important right—it gives others the confidence to deal with you, as you can be held accountable. Being able to discharge those obligations in bankruptcy means a LLC has to prove its reliability in other ways—for example, by holding more capital, or posting collateral, or simply offering better prices to make up for it. As it happened, this proved to be more efficient that unlimited personal liability, so LLC’s won out. Third parties could freely choose to deal with non-LLCs if they wanted to, and if they did, they would not be taxed to fund LLCs, so there is no subsidy.
The one case where you have a stronger case is with negative externalities, where an LLC might cause damage to third parties. In this case third parties are paying the ‘tax’ of the externality. However, I do not think this was the most important cause for the rise of the LLC, and there are many other checks and balances—for example, not just any LLC is allowed to own a nuclear power plant, you have to be very well capitalized.
Also LLC’s are generally more heavily taxed than partnerships, etc. - they pay income tax at the corporate level as well as at the individual level. They have risen to prominence despite this (literal) tax.
I would be wary of so quickly buying into LLC as only being laws ‘permitting’ it and having ‘superiority’. If a law was passed giving particular companies subsidies of billions of dollars, you might not be surprised if the companies did well and proved their ‘superiority’, but you would be a little nonplussed at people describing the subsidies as ‘permitted’.
As I understand it, LLCs are not so much permitted as subsidized: if you wanted to form a corporation or partnership before various countries fully legalized them, you certainly could, you were indeed ‘permitted’ to form corporations; what you got, however, was also full liability—the people who made up the corporation were liable for its actions. LLCs get a subsidy in shareholders being able to shed liability and risk for their actions beyond the net worth of the LLC. This is not a free lunch, however, and it comes at the expense of everyone who has a claim against an LLC and discovers it’s bankrupt or a shell and that they can’t pierce the corporate veil.
Limited liability is not a free lunch. Being able to be sued is an important right—it gives others the confidence to deal with you, as you can be held accountable. Being able to discharge those obligations in bankruptcy means a LLC has to prove its reliability in other ways—for example, by holding more capital, or posting collateral, or simply offering better prices to make up for it. As it happened, this proved to be more efficient that unlimited personal liability, so LLC’s won out. Third parties could freely choose to deal with non-LLCs if they wanted to, and if they did, they would not be taxed to fund LLCs, so there is no subsidy.
The one case where you have a stronger case is with negative externalities, where an LLC might cause damage to third parties. In this case third parties are paying the ‘tax’ of the externality. However, I do not think this was the most important cause for the rise of the LLC, and there are many other checks and balances—for example, not just any LLC is allowed to own a nuclear power plant, you have to be very well capitalized.
Also LLC’s are generally more heavily taxed than partnerships, etc. - they pay income tax at the corporate level as well as at the individual level. They have risen to prominence despite this (literal) tax.