Many, many problems with Mr. Hobbs' 'analysis.'

First, trying to compare current LLC formation to those in the late-1990s is dishonest. Many states didn't pass LLC legislation until the mid- to late-1990s.

Second, Mr. Hobbs' is missing the crucial datapoint here--what are the revenues being produced? Forming an LLC is absurdly cheap; one could form as many LLCs as they want without seeing one dollar of business generated.

There are other problems as well--many LLCs aren't new businesses. They're existing businesses that changed over from their old corporate structure. Do a simple 'google' search on LLC and you'll see quite a few familiar names. Iridium, BMW, Fox, Dow, Muzak, etc. Be sure to click on some of the less well-known names--you'll generally find they've been in business for quite a while. I clicked on a WilliamBlair & Company LLC--turns out they've been around since 1935.

Gee, sounds like the broken record refuted dozens of times ever since Mr. Hobbs started this project..... Again, Jade, is it your contention that 100% of this represents nothing but paperwork?

I do not share Jade's level of passion for this subject, but I can't help but lean in his direction.

All of this data is impressive, but what does our personal experience indicate? As I said recently, I know of several people who have given up looking for work with "real" companies and are now doing handyman-type work on their own. Don't forget, too, that most new businesses fail to survive beyond a couple of years or so. I have seen mortality figures as high as 80%.

The challenges are particularly great for older workers, meaning anyone who would not customarily be considered "young". Recently a friend of mine who worked as a research technician for a Fortune 100 company earning a high-40's income got a call from a recruiter. He is in his early 50's, with over 30 years of experience. He became a grandfather (and a good one) much earlier than he ever expected as well.

His wife answered the phone. After telling the recruiter that her husband was not in, the recruiter enthusiastically told her that he was extremely interested in talking to my friend after seeing his resume on the web. That's when she made the mistake. She said that he would be back right away, since he took their grandson down the street for an ice cream cone.

The recruiter deflated instantly (on hearing the word "grandson"?), and quickly offered to call back tomorrow. She said she would be happy to take down his number and have her husband call him back very shortly. The quick-thinking recruiter then said he really had to leave the office right away and would be sure to call back the following day.

The call never came.

JadeGold - of course LLCs were only authorized by many states in the mid-1990s. That's one reason I'm only comparing LLC formation rates of 2003 to the year prior (2002) and to 1999. Almost every state I've posted data for has data going back several years before 1999. Also, I'm not comparing each state to other states, so it matters less when each state first allowed LLCs.

What the data shows is a massive surge in the formation of LLCs in the last 2 years. Is some of that merely existing busiensses changing over from some other corporate structure? Of course. But much of that change-over happened in first year or two that a state allowed LLCs - surely in states that have allowed LLCs since 1992 or 1993 or 1994 or even 1995 has most any pre-existing business already made the change.

As a CPA commented in a previous post on this matter, of his 44 clients that are LLCs, not ONE became an LLC as a result of changing from another corporate structure.

But, JG, let's pretend for a moment that you're right and most of this LLC formation is just paper-shuffling rather than real new businesses being created. Please explain why there has been a sudden surge in interest in such paper-shuffling.

Semi, your friend's story is not new. Stories like that have been around, particularly in the tech industry, for years.

If you try to correct the situation with laws, then it won't keep the situation from occurring; those laws won't apply in India, and you have no effective means of enforcing them from here.

As a Tennessee corporate and tax lawyer, I can tell you my experience. If you're in TN, you'd likely know the name of my firm, if I named it. I do entity formations on a regular basis.

In TN, the LLC is a more expensive entity to form than either an S-corp or a C-corp. It is also more expensive to maintain ($300 per year minimum vs. $20 per year for the corp., not including franchise & excise taxes (F&E)). As a general rule, I advise start-up clients to form corporations (and particularly s-corps) to avoid this additional expense, with the notable exceptions of real estate holdings or family-owned passive investment entities (which are usually always formed as LLC's to avoid Tennessee's F&E tax. There are other exceptions as well, but TN's fees automatically put an LLC at a disadvantage for a start-up that is operating on a shoe string.

I do mergers, acquisitions and all sorts of the activities that JadeGold mentions. However, the activities JadeGold mentioned were largely confined to the mid-90's when entities could convert to LLC's and avoid paying F&E tax which only applied to corporations at that time. Kroger, in particular, formed LLC's in TN to take advantage of this. Most states, including TN, have closed this loophole and corporations no longer have a compelling reason to convert.

I have had a total of zero clients convert to an LLC in the last two years from another entity. All of mine have been new businesses, except for a couple which were formed in connection with obtaining VC financing for expansion. I would estimate that I have formed three times as many new entities in 2003 than 2001, and five times as many entities as I did in 2000, all of which were for new businesss or significant expansion.

Incidentally, I also have a good feel for what's going on in the rest of the state, as I talk to attorneys who do similar work on a regular basis. If there was a material move to re-structure organizations as LLC's, I'd certainly know about it. It simply isn't happening here. Similarly, it isn't happening in Delaware or Nevada, two states that are new entity magnets.

If nothing else, these new businesses are generating economic activity and are helping to keep some lawyers busy. Sorry, JG, but the rush to form LLC's with the enactment of LLC acts was over by probably 1996 in most states. Your concerns are largely misplaced.

Thanks Mike for the expert perspective, and for debunking JG's conversion theory.

You mentioned S-corps. Am I off base in suggesting that the surge in LLC formation is an indicator of a surve in new business formation?

I don't think you are off base at all. I think if you were looking at corporate formations instead of LLC formations, you would find similar results. Entity formation is growing across the board and it is largely due to new business formation.

Sure, some of them never make any money. All of them, however, represent significant investment in time, money and energy. Very few of them form without the anticipation of being profitable. Even without profits, significant economic activity occurs whenever a new entity is formed.

As a CPA commented in a previous post on this matter, of his 44 clients that are LLCs, not ONE became an LLC as a result of changing from another corporate structure.

Anecdotal.

Most established businesses can accomplish the reorganization in-house. That's one of the advantages of an LLC; it's not an onerous task to set up.

Even small businesses need very little help; they probably would utilize the same folks who do their accounting or provide other outsourced financial services.

JG, you are very good at providing assertions without facts. You have, despite commenting numerous times on the LLC posts on this site, never provided one single documentable FACT to back up your assertions.

Can you please provide some sort of documented factual evidence that the surge in LLC formation in the last 2 years is driven by conversions rather than by formation of new businesses?

... we'll wait.

And wait.......and wait.......and wait..............and still wait..........

Oh, and JG, you might consider this: each "anecdote" is still a data point. Accumulate enough of them and you are gathering valid data.

More "anecdotes" from the last two months:

new LLC for a new botox clinc
new s-corp for a spa
new LLC for a publishing company
new s-corp for an insurance agency
new LLC for an r&d company
new LLC to develop a medical office bldg
new s-corp for general contractor
new s-corp for a management company
new c-corp for a pharmaceutical co.

All new businesses. Every. Single. One.

I'd suggest that JG might want to consider debating an area in which he/she has some actual knowledge, if such an area can be found.

Sorry, Mike, anecdotes and a %1.69 get you the big coffee at Starbucks.

I have no doubt some of the new LLCs are startups. I also have no doubt quite a number of them are existing businesses.

I also have no doubt that some are marginally displaced white collar workers who don't want to be seen with a large hole in their resume.

Mr. Hobbs:

The proof can be easily ascertained; do a google search on 'LLC.' You'll be provided with page after page of LLC websites; some have familiar or, even, household names and brands. Others may be more obscure and unfamiliar. Merely click on those links and they'll generally have some link to the company's history.

But let's not try and deflect attention away from *your* thesis that the unemployment picture is actually quite rosy. After all, I'm not the one trying to claim all these folks who are selling the contents of their garages on eBay are actually new businesses.

Refuting "anecdotes" with anecdotes of your own. That's rich.

Mike:

Websites are anecdotes?

How quaint.

I suppose websites could be anecdotal but it seems like an awful lot of bother by these firms for no apparent purpose.

Vermont's Joint Fiscal Office did a somewhat dated study in 1996 on the effect of LLCs on Vermont businesses.

Here

They seem to believe the possibility of conversion of existing Vermont C and S Corps to LLCs--at least among small- and mid-sized businesses--was 'probable' to 'very probable.'

They seemed to base their findings on an earlier NY state study on LLCs/LLPs.

Of course, we could just wave our hands and deem it all anecdotal.

Interesting factoid though: the Vermont study found, in general, most business startups did not show a profit for the first 2 years. Just a little more rain on Mr. Hobbs' parade.

Thanks for your study from 1996. That was incredibly NOT helpful, as I've already told you that most conversions took place in the mid-90's. That wave has long since passed and many of the initial reasons for it have been removed by state legislatures.

One might want to keep in mind that many businesses that post losses also pay employees. Profitability does not equate with employment in the short-run. I'd suggest looking to the annual reports for companies such as Amazon and Ebay. How long were they in business before becoming profitable? Are you suggesting that they did not employ people before making a profit? Sure many entities are one-person shows. Many, however, are not.

Frankly, I could easily look at my files and those of my multi-state firm and call it a "study." You have no inkling as to how many data points I have. Instead, you prefer to use your stock response of "anecdotal" to valid points.

Calls today requesting new entities: (i)new entity for real estate acquisitions; (ii) new entity for construction business; (iii) new entity for an insurance agency subsidiary of an existing bank holding company.

Of course, according to you, most of these entities are just formed by laypeople because they are so easy to do, so apparently there is even more happening that what I'm seeing. (I love those, as I get lots of business from cleaning up the wreck when they've not considered the tax issues, capitalization issues, shareholder agreement issues, additional partner issues, financing issues, expansion issues, etc. Just keep using those cookie-cutter forms, folks. Pay me now or pay me later.)

Anecdotes, Mike, anecdotes.

I could look in my files and not find evidence LLCs/LLPs exist. How's that for anecdotes.

Are you seriously suggesting that all startups have the financial backing of an Amazon or eBay? Seriously? Remember, Mr. Hobbs is trying to argue that this LLC formation activity is replacing traditional employment.

The fact is most of these folks using the DIY forms aren't going to see significant revenues--if any at all. Therefore, their tax exposure is moot.