05 June 2009
Big Partnerships Can Work
One of the leading scholars of unincorporated entities like limited liability companies explains how the partnership model can work for large enterprises historically governed as corporations. His basic argument is that giving management an co-owner style compensation package and a duty to distribute excess cash makes up for weak limited partner governance rights. He notes that the need of partners to pay taxes on undistributed profits keeps the duty to distribute excess funds alive, while the double taxation of distributed earnings in corporations (favored by managers when the system was established in the 1930s) encourages retention of earnings which enhance management power at the expense of shareholders.