Mohsen Manesh is Associate Professor at University of Oregon School of Law. This post is based on a recent article authored by Mr. Manesh, and is part of the Delaware law series; links to other posts in the series are available here.
“The half truths of one generation tend at times to perpetuate themselves in the law as the whole truth of another, when constant repetition brings it about that qualifications, taken once for granted, are disregarded or forgotten.” [1] Chief Justice Cardozo, then sitting on the New York Court of Appeals, wrote these eloquent words in the early 20th century to describe the doctrine of consideration in contract law. But today, these words might well be applied to the most popular form of business entity, the limited liability company (“LLC”).
The half-truth is this: that LLCs are “creatures of contract.” Courts reflexively use this maxim to describe LLCs, the contract being, of course, the LLC agreement that governs the rights and obligations of the parties that own and manage the entity. [2] The judicial reflex to use this maxim is especially pronounced in Delaware, where today LLCs outnumber corporations by more than two to one. [3] Undoubtedly, Delaware courts have been spurred in part by the state’s LLC statute, which, like the LLC statute of many other jurisdictions, baldly asserts as its guiding policy “to give the maximum effect to the principle of freedom of contract and to the enforceability of [LLC] agreements.” And because Delaware LLC law, like its corporate law, enjoys an outsized influence in the business world, courts in other jurisdictions have now predictably embraced the “creatures of contract” mantra, too.
