Entrepreneurs' Choice of Business Format: A Cohesion of a Limited Liability Company and an Unlimited Partnership

Abstract

This thesis addresses entrepreneurs’ choice of business format and analyzes the consequences associated with choosing one format rather than another. The choice of business format should always be made based on thorough considerations regarding company- and tax law. The main focus of this thesis is on aspects of applicable company law, and how these affects the entrepreneurs’ choice, however to ensure a holistic view tax law is incorporated to a lesser extent. The analysis is designed as a cohesion of pros and cons between a Limited Liability Company (hereafter named LLC) and an Unlimited Partnership (hereafter named UP), regarding essential aspects to entrepreneurs which are assessed to include requirements regarding: the start-up, financing and creditor protection, organizational aspects, resolution, and applicable tax law. In addition to the cohesion of the two business formats, this thesis analyzes if newer Danish company laws has made it more attractive for an entrepreneur to choose one of the formats rather than the other. This comprehensively includes an illustration of the introduction of the control package, and the introduction and abolishment of the entrepreneurial company format. Despite this thesis finding striking differences between the LLC and the UP that aren’t subject to registration, this thesis can’t determine one of the business formats as more attractive to entrepreneurs than the other. The participants’ individual preferences, and their current financial and tax related circumstances are found to be essential to the choice of business format. This thesis does however continuously determine in which situations a business format seems favorable, and what preferences an entrepreneur in these cases are subject to. These preferences are mainly found to relate to the following issues: to what extent the participants are liable for the company’s debt, the range of freedom in structuring their own rules regarding the company, and the entrepreneurs’ view on registration obligations. Furthermore, this thesis finds that the introduction of the control package has increased the gap between the LLC and the UP that aren’t subject to registration. Because of the novelty of the regulation this thesis can’t conclude how this increased gap will affect the entrepreneurs’ choice of business format. Finally, this thesis finds that the introduction of the entrepreneurial company format was a factor thatsignificantly affected entrepreneurs’ choice of business format, given that it was extremely popular. The abolition of the format on the other hand, doesn’t seem to affect whether entrepreneurs choose an LLC or an UP as business format, but rather affects Denmark on a societal level with fewer newly established companies.