Business Organization and Corporate Issues Legal Resource Materials
Entrepreneurship Law Editorial Team
Frank H. Easterbrook & Daniel R. Fischel, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991).
Abstract (from Amazon Product Description):
The authors argue that the rules and practices of corporate law mimic contractual provisions that parties would reach if they bargained about every contingency at zero cost and flawlessly enforced their agreements. But bargaining and enforcement are costly, and corporate law provides the rules and an enforcement mechanism that govern relations among those who commit their capital to such ventures. The authors work out the reasons for supposing that this is the exclusive function of corporate law and the implications of this perspective.
Anthony Mancuso, THE CORPORATE RECORDS HANDBOOK: MEETINGS, MINUTES & RESOLUTIONS (2010).
Product Description (from Amazon): Provides forms you need to keep your corporation valid in the eyes of the IRS and courts. If you've taken the time to turn your business into a corporation, chances are you'd like to see it stay that way. Your business card may say "incorporated," but if the courts and the IRS think differently, its closing time. Because meeting minutes are the primary paper trail of a corporation's legal life, it's important to know when and how to prepare these minutes.
Joseph A. McCahery & Erik P.M. Vermeulen, CORPORATE GOVERNANCE OF NON-LISTED COMPANIES (2008).
Abstract (from product description at Amazon.com):
Studies of corporate governance traditionally focus on the governance problems of large publicly held firms, and policymakers' recommendations often focus on such firms. However most small firms, and in many countries, even many large companies, are closely held. This book provides a comprehensive account of closely held businesses and their particular governance problems. It explores current discussions and reforms in Europe, the United States, and Asia providing a state of the art account of the law and the economics. The governance of closely held companies has traditionally been concerned with protecting investors and creditors from managerial opportunism. However, the virtual elimination of the distinction between partnerships and corporations means that an effective legal governance framework must also offer mechanisms to protect shareholders from the misconduct of other shareholders. This volume examines policy and economic measurements to develop a framework for understanding what constitutes good governance in closely held companies. The authors examine how control is gained in the various types of closely held firms and explore the mechanisms that contribute to the development of a modern and efficient governance framework for these companies. The book concludes with an exploration of how the closely held firm is likely to stimulate growth and extend innovation and development.
Michael Spadaccini, Entrepreneur Magazine's Ultimate LLC Compliance Guide (2011).
Abstract (adapted from description on Amazon.com):
Mindful of the complications and numerous requirements that surround LLCs, Entrepreneur and Michael Spadaccini walk you through the details of what you need to know about your state's LLC act as well as the procedures for dealing with the extensive rules and regulations.
Turn to this go-to guide for complete definitions and explanations of all concepts surrounding LLCs and even a breakdown of the roles and responsibilities of owners and managers. You'll learn about LLC legal formalities, internal governance, record-keeping, vital LLC mechanics and more--all critical information that will allow you to spend less time researching procedures and more time running a successful business! Plus, use sample documents, checklists, resources, and forms to get a better grasp of the LLC process.
Cassady V. ("Cass") Brewer, A Novel Approach To Using LLCs For Quasi-charitable Endeavors (a/k/a "Social Enterprise"), 38 Wm. Mitchell L. Rev. 678 (2012).
(adapted from author):
This article sets forth a hypothetical social enterprise project in need of capital. It summarizes the principal advantages and disadvantages of using either a nonprofit entity or a for-profit entity to pursue the project. Finally, the article describes a new, proposed "contract hybrid" LLC structure that potentially reconciles the competing for-profit and nonprofit capital and other demands of the project.
Brian J. Broughman, The Role of Independent Directors in Startup Firms, 2010 Utah L. Rev. 461 (2010).
Abstract (from author):
This Article develops a new theory to explain the widespread use of independent directors in the governance of startup firms. Privately held startups often assign a tie-breaking board seat to a third-party independent director. This practice cannot be explained by the existing corporate governance literature, which relies on diffuse ownership and passive investment-features unique to the publicly traded firm. To develop an alternative theory, I model a financing contract between an entrepreneur and a venture capital investor. I show that allocating a tie- breaking vote to an unbiased third party can prevent opportunistic behavior that would occur if the firm were controlled by its entrepreneur or VC investor. Rather than monitoring management, independent directors in a startup firm "arbitrate" disputes between entrepreneurs and investors. Consistent with my theory, empirical data from Silicon Valley startups illustrate several mechanisms entrepreneurs and VCs use to select an unbiased independent director. My analysis has implications for corporate law, as it suggests that heightened fiduciary protections could undermine the role of the independent director in startup firms.
Jaclyn Cherry, Charitable Organizations and Commercial Activity: A New Era Will the Social Entrepreneurship Movement Force Change? 5 J. Bus. Entrepren. & L. 345 (2012).
Abstract (by author): It is no longer a new trend for charitable organizations to become involved in commercial activities. Thousands of nonprofit organizations have embraced the social entrepreneurial concept and have either created “commercial” type ventures as part of their nonprofits, have created spin-off organizations or subsidiary organizations, or have moved into the new area of hybrid organizations. Because there are no clear rules or guidelines for dealing with this issue, the third sector finds itself with rogue components and a spin-off group of hybrid organizations being loosely termed “social entrepreneurs.” Though these groups have grown in numbers in recent years, they have faced their own trials and tribulations, and success has been mixed. The purpose of this article is to take a broad look at where we are now as a result of the continuing confusion regarding the “commerciality doctrine”, the test being used by courts to interpret the operational test of IRC § 501(c)(3), which has pushed many an organization into these murky waters. It will focus on three areas influencing and defining organizations that are struggling with the law in this sector: 1) it will briefly define commercial activity in terms of social entrepreneurship and provide examples of organizations that have entered this hybrid sector as L3C Organizations and B Corporations; 2) it will give an overview of the law that has developed as the “commerciality doctrine”; and 3) it will discuss the unrelated business income tax and suggest that this test needs to be utilized by courts in conjunction with the “commerciality doctrine” for there to be any semblance of order. Finally, this article concludes by suggesting that changes within the system are overdue and proposes a three-part analysis to be used going forward.
Christen Clarke, California's Flexible Purpose Corporation: A Step Forward, A Step Back, or No Step at All? 5 J. Bus. Entrepren. & L. 301 (2012).
Abstract (by author): The roads of social welfare and commercial enterprise have come to an intersection in recent years. Laws governing corporations are expanding to make room for new forms of business entities that seek to satisfy both social and financial goals. The two most prominent “hybrid” business forms are the Low Profit Limited Liability Company and the Benefit Corporation. The newest hybrid entity to take effect is the Flexible Purpose Corporation, which was introduced in California at the beginning of 2012. With the existence of hybrid organizations that already fit into the mold of Corporations and Limited Liability Companies, is there really a need for this new Flexible Purpose Corporation entity?
Claire Moore Dickerson, Informal-Sector Entrepreneurs, Development and Formal Law: A Functional Understanding of Business Law, 59 Am. J. Comp. L. 179 (2011).
This article argues that to truly support informal-sector entrepreneurs, a government must create and enforce laws that lead to predictable, stable business environment beyond laws that just regulate contract and business entities.Daniel S. Kleinberger, Sorting Through the Soup: How do LLCs, LLPs, and LLPs Fit Within the Regulations and Legal Doctrines?, Bus. L. Today 15, (Nov./Dec. 2003).
Ross B. Emmett, Frank H. Knight on the "Entrepreneur Function” in Modern Enterprise, 34 Seattle U. L. Rev. 1139 (2011).
Abstract (from author):
Frank Knight’s theory of the entrepreneurial function in modern enterprise is explored in two contexts. The first is the dismissal of the neoclassical theory of business enterprise by Berle and Means in The Modern Corporation and Private Property, and their subsequent call for measures that would ensure corporations acted in the social interest. The second context used to explore Knight’s theory of entrepreneurship is his later arguments regarding the problem of intelligent control in a democratic society. Underlying all of Knight’s work are his concerns about freedom and moral judgment in the midst of uncertainty, with the attendant problems commonly referred to today as the principal-agent problem and moral hazard. Knight argues that the entrepreneur personally absorbs these problems through his responsible direction of the modern enterprise; seen this way, profit is not just the return for bearing the risks of unknown consequences, but specifically for the courage to take up the challenge of organizing productive resources in the face of principal-agent and moral hazard problems. In the latter part of Risk, Uncertainty, and Profit, Knight argues that social functionaries are not entrepreneurs, and hence that democratic action will be plagued by principal-agent and moral hazard problems; a conclusion that much vexed him in his later ruminations on the fate of liberal democratic society. Were the authors to apply Knight’s insights to Berle and Means’ call for social control of the modern corporation, one could turn their argument around and ask: control by whom, for whose interest?
Ryan J. Gaffney, Hype and Hostility for Hybrid Companies: A Fourth Sector Case Study, 5 J. Bus. Entrepren. & L. 329 (2012).
Abstract (by author): The traditional three-sector ownership model of society grows outmoded. The prevalence of quasi-governmental agencies, public-private partnerships, and government bailouts blurs the line between the public and private sectors. Of concern to this article, however, is the blurring between the private and nonprofit sectors. The cross-pollination is so widespread that a call stands to amend the existing model with an “emerging fourth sector.” The social entrepreneurs attempting to bridge the gap between sectors face limitations from the outset of their venture; legislators did not design traditional legal entities for a “double bottom line” that includes social impact as well as profit. Because the demand exists, and because a lethargic legislative response will not hinder the entrepreneurial spirit, these pioneers have attempted to form hybrids under existing legal frameworks. Complexity and cost, however, significantly deter this avenue of social enterprise. Consequently, state legislatures have begun to address the need for legitimate hybrid alternatives. The two business forms attracting the most legal, legislative, and media attention are the Low-profit Limited Liability Company (L3C) and the Benefit Corporation (B Corporation). The L3C, a Limited Liability Company (LLC) hybrid, exploits the LLC's organizational flexibility, while attracting capital for the actual enterprise through Program Related Investments. The B Corporation is a corporation hybrid that permits a company's board and management to contract around the rule of profit-maximization. While both frameworks have merit, they are at once competing for the same share of public-consciousness and legislative attention. The author contrasts the two against the backdrop of the WorldOne case.
Roger M. Groves, New Age Athletes as Social Entrepreneurs: Proposing a Philanthropic Paradigm Shift and Creative Use of Limited Liability Company Joint Ventures, 11 Wake Forest J. Bus. & Intell. Prop. L. 213 (2011).
This article examines how former professional basketball players have been able to fund philanthropic projects in their communities. Through the use of different business organizations and tax strategies, they have been able to maximize the return on their brand of social entrepreneurship.
J. Haskell Murray, Choose Your Own Master: Social Enterprise, Certifications, and Benefit Corporation Statutes, 2 Am. U. Bus. L. Rev. 1 (2012).
Abstract (by author): In the wake of the most recent financial crisis, interest in social enterprise has increased exponentially. Disillusioned with the perceived shareholder wealth focus of corporate law, entrepreneurs, investors, customers, and governments have become more receptive to new paradigms. In the past four years, nineteen states have passed at least one of five different types of social enterprise statutes and many additional states are considering similar legislation. Focusing primarily on the benefit corporation form, this Article examines three main issues: (1) whether social enterprise statutes are potentially useful; (2) how social enterprise law can be improved; and (3) whether the social enterprise movement will be sustainable. First, regarding usefulness, this Article recognizes that the traditional legal framework already provides social entrepreneurs most of the flexibility they seek, but posits that the social enterprise statutes may better combat perceptions of a shareholder wealth maximization norm arising from existing for-profit corporation law (especially in Delaware). As a potential alternative to social enterprise statutes, this Article suggests that states like Delaware could simply amend their existing corporate codes to expressly allow for a societal-or environmental-focused objective in a corporation's charter. Second, regarding improvements to existing social enterprise law, the Article suggests: (i) statutorily requiring social entrepreneurs to choose their own primary master; (ii) recognizing modified versions of traditional corporate law concepts; (iii) lowering transaction and uncertainty costs; and (iv) eliminating or modifying certain mandatory rules. Third, regarding sustainability, this Article concludes that the most intensive social enterprise branding efforts should be left to the private sector organizations like B Lab; and social investors, perhaps using new vehicles like crowdfunding and Social Impact Bonds, must fill the funding gap left by hesitant traditional investors.
J. Haskell Murray & Edward I. Hwang, Purpose with Profit: Governance, Enforcement, Capital-Raising and Capital-Locking in Low-Profit Limited Liability Companies, 66 U. Miami L. Rev. 1 (2011).
Abstract (adapted from authors):
This article begins by considering the growing social enterprise movement, the limitations of existing legal forms in accommodating social enterprise, and the potential benefits of new legal entities to carry out simultaneous for-profit and nonprofit missions. It also examines how the Low-profit Limited Liability Company (L3C) legal form is structurally designed to overcome existing legal deficiencies and work within the existing business and legal landscape. Moreover, it addresses the concerns of the most strident faultfinders of the L3C and the policy implications of the continued adoption of L3C legislation. The article next compares and contrasts the seemingly conflicting fiduciary duties in the for-profit and not-for-profit areas, before moving on to propose a blended fiduciary framework for hybrid business forms, such as L3Cs. It submits that a company can have multiple purposes, but can have only one primary master. While deviations from the path should be allowed under the business judgment rule, the authors submit that managers of L3Cs should focus primarily on the organization's “charitable purpose.” Similar to the rights of members of profit-focused LLCs, the authors believe that members of L3Cs should have standing to sue for a breach of fiduciary duty by the entities' managers. Finally, the article examines the capital-raising and profit-payout puzzles faced by L3Cs and largely unaddressed by early commentators on the L3C form. The article concludes that while traditional profit-focused investors may not be well suited for investment in L3Cs, the L3C form is still viable.
Christopher D. Hilton, Low-Profit Limited Liability Companies (L3cs): Many Traps for the Unwary Social Entrepreneur, 87 Tul. L. Rev. 169 (2012).
(Abstract by author): Amid a sluggish economy and fiscal challenges at every level of government, the low-profit limited liability company (L3C) has spread rapidly over the past four years, promising a way to spur investment in small businesses and achieve socially beneficial goals with minimal governmental expense or oversight. The L3C's calculated and focused marketing campaign has convinced eight states, including Louisiana, to adopt this new business structure, but the substance of this corporate form leaves much to be desired. Although the L3C is designed to combine investment capital from nonprofit foundations and private investors, the current L3C laws fail to deliver on that promise. The L3C business form, with its distortion of tax policy, inherently conflicting goals, and intractable governance problems, offers nothing but pitfalls and obstacles to the socially beneficial, hybrid enterprises that it purports to help.
Jeffrey M. Hirsch, Employee or Entrepreneur?, 68 Wash. & Lee L. Rev 353 (2011).
Abstract (from author): This comment on Micah Jost’s Note, Independent Contractors, Employees, and Entrepreneurialism Under the National Labor Relations Act: A Worker-by-Worker Approach, 66 Wash. & Lee L. Rev. 311 (2011) was part of the Washington and Lee Law Alumni Association Student Notes Colloquium. In his Note, Jost addresses an increasingly problematic aspect of NLRA law: The ability and willingness of employers to exclude workers from coverage under the statute by classifying them as independent contractors. This problem has existed since the early days of the NLRA, but is worsening as a result of changes in the modern workplace. Adding fuel to this fire, and creating the impetus for Jost’s Note, is the D.C. Circuit’s new test that makes mere entrepreneurial opportunity the cornerstone of the employee/independent contractor analysis. This test defies both well-established precedent and the policies of the NLRA. Moreover, as Jost demonstrates, the common-law analysis - although superior to the D.C. Circuit’s formulation - is in dire need of reform itself. Ideally, this reform would be substantial, either through legislation or a new willingness by the Supreme Court to abandon a strict compliance with the common-law analysis. The result would hopefully produce a more flexible, policy- oriented definition of employee that - especially in combination with increased audits and penalties for misclassification, as well as more attempts to provide workers with the information and tools needed to challenge misclassifications - would better capture the type of employees that the NLRA was intended to cover. Only through such a change will the NLRA maintain relevance for a growing number of workers who look like employees but are now treated as independent contractors by their employers.
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Law and Finance, 106 J. Political Economy 1113 (1998).
Charles R. T. O’Kelley, Coase, Knight, and the Nexus-of-Contracts Theory of the Firm: A Reflection of Reification, Reality, and the Corporation as Entrepreneur Surrogate, 35 Seattle U. L. Rev. 1247 (2012).
Abstract (adapted from author): Scholars routinely credit R. H. Coase and his first seminal work -- The Nature of the Firm -- as the progenitor of the nexus-of-contracts theory of the corporation. This articles argues for a different understanding of Coase's theory of the firm and its implications for legal research into the nature of the modern corporation. An argument is made that nexus-of-contracts scholars' claims to Coase's lineage are based on a misapplication of Coase's central insights and the pursuit of a very different research project that underlay The Nature of the Firm. Coase's insights must be understood as an extension of Frank Knight's grand opus -- Risk, Uncertainty, and Profit -- and as an extension of Knight's theory of the entrepreneur. This article takes a fresh look at the evolution of the theory of the firm and then details how a new account of the incorporated firm is warranted. The article outlines the research agenda that dominated mainstream economic accounts of the firm prior to Knight and Coase and sketches Knight's seminal account of the entrepreneur. Coase's theory of the firm is described, placing it in the context of Knight's earlier work and highlighting Coase's important identification of the law's place in a real world theory of the firm. The article also explores the implications of Coase's seminal insights for corporation law scholars working on understanding the modern corporation and the theory of the corporation that Coase's work suggests for that work.
Keren G. Raz, Toward an Improved Legal Form for Social Enterprise, 36 N.Y.U. Rev. L. & Soc. Change 283 (2012).
Abstract (by author): Lawyers, policymakers, and social entrepreneurs are engaging in a vigorous debate regarding new legal forms for social enterprise. Some argue that commercial activity in the non-profit sector is not new and does not require a new legal form; others argue that new legal forms, including the Low-profit Limited Liability Company (L3C) and the Benefit Corporation, can meet the needs of social enterprise; and still others argue that new legal forms are needed. This debate has suffered, however, from a fractured understanding of foundational issues related to the meaning of “social enterprise” and the limitations of existing legal forms in facilitating it. This paper seeks to repair our fractured understanding of social enterprise by (1) clarifying what social enterprises are and how they differ from other organizations; (2) revealing what social enterprises require from a corporate form; (3) explaining how existing corporate structures, including the L3C and the Benefit Corporation, fall short in meeting those requirements; and (4) briefly considering the characteristics of a new legal form for social enterprise that will better facilitate the growth and success of these promising organizations.
Dana Reiser Brakman, The Next Big Thing: Flexible Purpose Corporations, 2 Am. U. Bus. L. Rev. 55 (2012), available at http://ssrn.com/abstract=2166474.
Abstract (by author): Over the past few years, jurisdictions across the country have enacted specialized organizational forms to house social enterprises. Social enterprises are entities dedicated to a blended mission of earning profits for owners and promoting social good. They are neither typical businesses, concentrated on the bottom line of profit, nor traditional charities, geared toward achieving some mission of good for society. Their founders instead see value in blending both goals. They believe their social enterprises will be superior to traditional businesses by considering and internalizing the social costs they produce. They believe social enterprises more efficiently produce social goods than traditional charities by applying business methods to this important work. Yet, these social entrepreneurs worry traditional organizational forms designed for either businesses or charities will constrain their ability to achieve the gains they see in blended mission enterprises. Legislatures have obviously been convinced. Since 2008, lawmakers in nearly one-third of U.S. jurisdictions have enacted enabling legislation providing one or more specialized forms designed to house social enterprises. Thus far, these specialized forms have taken three distinct types, the latest of which is the subject of this Article: the flexible purpose corporation.
Felicia R. Resor, Benefit Corporation Legislation, 12 Wyo. L. Rev. 91 (2012).
Abstract (adapted from author): When the Maryland Governor signed into law the nation's first benefit corporation legislation, state Senator Jamie Raskin remarked, “This is a great moment in the evolution of commercial life in Maryland and America. We are giving companies a way to do good and do well at the same time. The benefit corporations will tie public and private purposes together.” A benefit corporation is one of a handful of new business entities designed to accommodate businesses that aim to benefit society in more ways than traditional corporations can through contributions to shareholders, consumers, employees, and general economic growth. In a growing number of states, lawmakers have passed legislation creating various new business entities to house social enterprise and organizations that blend for-profit and not-for-profit purposes. Benefit corporations are best understood within the broader context of corporate social responsibility (GSR) and its more recent offshoots, social enterprise and organizations with hybrid purposes. The creators of the new legal form, the benefit corporation, explain that hybrid organizations use “the power of business to solve social and environmental problems.” Social enterprise and businesses with hybrid purposes can have a primarily for-profit or a primarily not-for-profit purpose, yet with either combination the organizations will incorporate social and environmental responsibility into their policies. This comment begins with a short background to introduce the primarily binary organizational system and its limitations on corporate social responsibility. The background also introduces three hybrid legal forms now available in various states: the benefit corporation, the flexible purpose corporation, and the low profit limited liability company (L3C). Next, the analysis section demonstrates how benefit corporation legislation addresses three problems that organizations with hybrid purposes face as traditional for-profit corporate entities: (1) the shareholder wealth maximization norm; (2) the lack of accountability standards; and (3) the lack of transparency standards. The analysis argues that because of a benefit corporation's features that address these problems, it is a better form for social enterprise than a traditional corporation. The analysis then describes how benefit corporation legislation can create economic opportunity in Wyoming and is consistent with Wyoming public policy. In conclusion, this comment argues the Wyoming legislature should adopt benefit corporation legislation to create more legal clarity, accountability, transparency, and economic opportunity.
Larry E. Ribsein, The Emergence of the Limited Liability Company, 51 Bus. Law. 1 (1995).
Abstract: Three years ago, The Business Lawyer published the first comprehensive survey of the law relating to limited liability companies (LLCs), The Limited Liability Company: A Study of the Emerging Entity. When that article was written, only eight states had passed LLC statutes. There was no settled model for the LLC, no settled tax treatment beyond the rudimentary partnership tax classification of some Wyoming LLCs, and no clear recognition of LLCs outside of their formation states. "Emerging" aptly described the LLC form.
Brett A. Seifried, Mind the Gap: Using the History and Theory of Profit and Nonprofit Corporations to Remedy the Problems of Social Enterprise in Low-Profit Limited Liability Companies — A Theory and Practice Approach (2012), available at http://ssrn.com/abstract=2083827.
Abstract (by author): This Article is about social enterprise. It lays out what it is, its theoretical foundation, two major problems facing it, and recommendations for how to resolve those problems. The story and the diagnosis rely on history and extrapolation. It provides an introduction to the theory of the limited-liability form, the shape of its obligations, and how those obligations respond to progress and profit. Specifically, this Article argues that low-profit limited liability companies can be sustainable forms, if they import certain procedural and organizational lessons from profit and charitable corporations. These include broad fiduciary duties, accounting separation, disclosure to the states attorney general, derivative lawsuit procedures, and appropriate dissolution provisions. That progress and profit can and do helix together is a thread that runs throughout the Article. One major division separates Parts I and II from Part III, though. Parts I and II discuss and rebut two major criticisms of L3C’s. As such, they are broadly historical, while Part III is a practical application of those experiences to running and counseling a social enterprise. These broad visions may be read separately, but are better understood when digested together. As always, the theoretical informs the pragmatic and the pragmatic reforms the theoretical. Like the topic itself, this Article on social entrepreneurship weds two potentially conflicting frameworks into a meaningful whole.
Christoph Van der Elst, The Risk Management Duties of the Board of Directors (Financial Law Institute, Working Paper Series 2013-02), available at http://ssrn.com/abstract=2267502.
Abstract (adapted from author): The board of directors is responsible for an appropriate business risk management environment. The paper studies in a comparative way how legislators and courts fill this duty. The authors question whether the legislative and regulatory framework will improve the equilibrium between entrepreneurship and risk control. The authors advocate for a distinct approach for strategic and operational risk management, defining risk appetite and tolerance and sufficient monitoring. The authors also call for full and detailed reporting and compliance risk management.
Bill Mann, Dual-Class Shares, Second Class Investors, Motley Fool (Apr. 14, 2004).