DELAWARE FOR SMALL FRY: JURISDICTIONAL COMPETITION FOR LIMITED LIABILITY COMPANIES

Most of the work on jurisdictional competition for business associations has focused on publicly held corporations and the factors underlying Delaware's dominance in attracting formations of large out-of-state corporations. We examine an analogous jurisdictional competition to attract formations by closely held limited liability companies (LLCs). The LLC offered the first attractive business form for closely held limited liability firms unconstrained by the legacy of corporate default rules. State legislatures have adopted and changed LLC statutes rapidly over the past twenty years. Unlike general and limited partnerships, which have been shaped by uniform laws, LLC statutes vary significantly. These circumstances offer an opportunity to test statutory provisions and other factors that influence LLCs' choice of where to organize. Exploiting a new database that for the first time reveals home and formation states of closely held firms, we find evidence that large LLCs, like large corporations, tend to form in Delaware, and that they do so for many of the same reasons that is, for the quality of Delaware's legal system. We reject other potential explanations for LLCs' formation decisions based on variations in state statutory provisions. Our evidence sheds new light on forces underlying the market for law.