A Step in the Right Direction: Washington Passes the Limited Liability Company Act
| Publication year | 1994 |
I. Introduction
On April 1, 1994, Washington passed the Limited Liability Company Act.(fn1) In doing so, the Washington Legislature provided Washington businesses with the option of an organizational form that combines the characteristics of limited-liability and pass-through taxation: the Limited Liability Company (LLC).(fn2) Before the creation of the LLC, businesses typically had to choose between pass- through taxation, found in partnerships(fn3), and limited liability, found in corporations.(fn4) The LLC provides the best of both worlds.
The LLC option will benefit Washington State's economy in two ways. First, Washington's LLC statute prevents exposure of LLC members and managers to personal liability.(fn5) Without a LLC statute, businesses that attempted to operate under the LLC form would not have been guaranteed limited liability for their members and managers. Without an LLC statute the LLC's members and managers could be exposed to personal liability for the debts and obligations of the business. Such exposure would have created a great disincentive for LLCs organized in other states to do business in Washington. Second, the LLC form provides an additional option for Washington-based risk-averse investors and businesspersons to participate in the local economy. Therefore, although Washington has historically been viewed as a state hostile to business, the recent passage of the LLC Act is an indication that Washington is working to become an attractive forum to businesses on the local, national, and international levels.
This Article describes how and why the LLC Act was passed, and provides a general outline of the LLC form in Washington. Section II outlines the perceived barriers to operating a business in Washington state. Section III sets out a brief legislative history of the Act, including the attempts by the Washington State Trial Lawyers Association to block the legislation, and proposed amendments to the legislation. Section IV describes the specifics of the LLC entity by reference to the Washington Limited Liability Company Act. Section IV also presents the comparative advantages of LLCs to other business forms. Finally, Section V concludes by discussing the specific advantages LLCs can provide to Washington State by encouraging domestic and foreign investment in the local economy.
II. Washington's Barriers to Business
Washington has been viewed as a state hostile to business. With the combination of Governor Mike Lowry's increase in business and occupational taxes in 1993, and the subsequent tax-revolt,(fn6) the general sentiment among local businesspersons has been one of increasing frustration over the difficulty and cost of operating as a business in Washington State.(fn7) A survey conducted during the summer of 1993 found that nearly one in twelve Washington businesses indicated a forty percent chance or better of moving their firm out of state.(fn8) Similarly, in early 1993 Boeing Chairman Frank Shrontz stated that a proposed superjumbo jet would be built outside of Washington because of the state's tax and regulatory burdens.(fn9) Even as early as 1991, Shrontz "warned that the greater Seattle area could become another 'rust belt' if state government didn't work to make the business climate more attractive."(fn10) According to Don Brunell, head of the Association of Washington Business, "Washington. . .has done things to discourage the creation of jobs."(fn11)
In response to Lowry's 1993 increase in business and occupational taxes, the Association of Washington Business (whose members include Boeing, as well as thousands of smaller businesses) endorsed Initiative 602. This initiative would have repealed the recently imposed tax increases.(fn12) The petition for Initiative 602 netted 440,160 signatures, more than double the number required to get the initiative on the ballot.(fn13) And although Initiative 602 did not pass, its strong support evidenced a growing discontent with Washington's business climate, particularly among businesspersons. Even the business communities of Oregon and Idaho were beginning to view Washington as having a less than desirable business climate.(fn14) Idaho manufacturers called Lowry's tax increases "The Idaho Economic Development Act."(fn15)
An undesirable business climate would make it difficult for Washington to compete economically, not only on a local and national level, but also on a global level. An inability to compete in these global markets would hurt Washington's government revenues and private-sector jobs.(fn16)
Washington has taken two positive steps towards participating in the changing global markets: Mike Lowry's fervent support of the North American Free Trade Agreement (NAFTA), and Washington's enactment of the LLC enabling act. Lowry recognized the importance to Washington's economy of participating in global markets. With the passage of NAFTA and Washington's location on the Pacific Rim, Washington businesses are now in an excellent position to invest in transpacific, Canadian, and Mexican markets. According to Lowry, one of every five jobs in Washington is connected to international trade.(fn17) Lowry has also predicted that because of the passage of NAFTA Washington's trade with Mexico will double in the next three years.(fn18)
By passing the LLC Act, Washington has taken a step towards creating a friendlier climate for investment in the state's economy by providing a new organizational option for the changing global market. This option gives investors in the local economy substantially more flexibility in the way they are able to conduct business in Washington.
III. A Brief Legislative History
This Section briefly outlines the major obstacles faced by the LLC Act in the Washington Legislature: opposition of the bill by the Washington State Trail Lawyers Association, and two proposed amendments.
Despite the LLC's potential economic benefits to the state, one Washington organization lobbied heavily against the bill as it was originally written. The Washington State Trial Lawyers Association (WSTLA) opposed the LLC Act because its members were concerned that allowing businesses to use the LLC business form as it was initially proposed would create two problems. First, WSTLA argued that, because no statutory remedy was included in the bill, certain classes of people who are injured by tortious acts of the LLC's agents would be at the mercy of the company or the courts for compensation.(fn19) WSTLA argued that because the LLC entity is relatively young, courts have not yet given shape to the company's non-contractual duties to its members, creditors, employees, and to the members of the community within which the LLC operates.(fn20) As a result, it is unclear which parties will be able to recover if injured by the actions of a LLC.(fn21) WSTLA was concerned that third parties injured by the actions of a LLC would have no course for recovery.(fn22)
Second, WSTLA was concerned with the potential for abuses by LLCs under the shield of limited liability.(fn23) It argued that companies could use the LLC form to isolate their potentially risky products or activities from their assets.(fn24) A corporation could lodge those risky products or activities in a subsidiary formed as an LLC.(fn25) Because of the shield of limited liability, the member-corporation's assets could remain protected in the event of accident or injury caused by that unsafe product or activity.(fn26) Thus, WSTLA argued that the shield from liability would provide those companies with a safe harbor within which they could act irresponsibly without the threat of personal liability.(fn27) Further, WSTLA claimed that even though a company could achieve limited liability protection by incorporating, it would choose the LLC form because of the tax advantages.(fn28)
WSTLA also argued that members would have little incentive to adequately capitalize the LLC because it is taxed on an aggregate level.(fn29) Thus, the LLC would have few assets from which the injured party could recover.(fn30) And, because the LLC shields its members from personal liability, the injured party would not be able to automatically reach beyond the entity to the assets of its members. Without a clear possibility of personal liability, parties would also have little incentive to obtain adequate insurance.(fn31)
WSTLA argued that the government has a responsibility to protect the public generally from the tortious acts of others.(fn32) While the trend in business has been towards encouraging economic growth, little emphasis has been placed on how stimulating that growth impacts the community. WSTLA asserted that the pursuit of economic prosperity should not undercut primary societal goals such as justice and equity.(fn33)
Because of its concerns, the Washington State Trial Lawyers Association lobbied for two amendments to the bill: one requiring LLCs to obtain a minimum amount of insurance, and the other imposing personal liability on members and managers of LLCs engaging in hazardous or potentially dangerous businesses.(fn34)
1. Amendment Requiring Liability Insurance
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