Individual owner compensation in a hybrid limited liability entity in a comparative context: LLC (the USA), LLP (the UK) and the small partnership (Lithuania)

Abstract

The article examines regulatory approaches to individual owner compensation that does not take the form of profit sharing in a hybrid limited liability entity in the three jurisdictions—in a limited liability company (LLC) in the USA, a limited liability partnership (LLP) in the UK (for the sake of accuracy only England will be referred to hereafter), and a small partnership with all members-individuals mandatorily in Lithuania. The comparative analysis reveals a divergence in the regulatory approaches to compensating a hybrid entity owner for the entrepreneurial efforts in small and medium-sized businesses. The most flexible regime includes the default no-compensation rule coupled with the possibility for an owner to act in a non-member capacity and it applies to an LLC in the USA under ULLCA. The Lithuanian legislation imposes the most rigid approach and prohibits a member from compensating for an additional role (either as an employee or an independent contractor) in a small partnership (save for a member–manager in a manager-managed small partnership and a member representative in a member-managed small partnership). England follows an intermediate approach and allows members of an LLP to depart from the no-compensation rule; but England will likely restrict the dual status of a member–employee in the entity. The article concludes that, although partnership principles heavily influence the owners’ role in a hybrid entity, the general ban foreseen in the Lithuanian legislation needs to be modified to allow similar freedom as a private limited liability company has to reward hybrid entity owners for their efforts in running business operations.