The Law of Superheroes
Page 15
Sole Proprietorships
The most basic kind of business entity is the sole proprietorship. Very briefly, sole proprietorships occur when a single individual goes into business for himself and doesn’t create any kind of formal business entity. When Peter Parker works as a freelance photographer without forming a business entity through filing appropriate documents with the state government, he’s effectively operating a sole proprietorship. Sole proprietors are completely and personally liable for all the debts and torts related to their business activity. What this means is that if the business goes under, all of the proprietor’s personal assets are exposed to his creditors. Any business income is treated as personal income for tax purposes. As far as superheroes go, pretty much any superhero—or supervillain—that just sets out to save/conquer the world on his own, without there being any discussion or implication of a business entity, would be treated like a sole proprietor in that there would be no distinction between his “business” activities and his personal activities. He would be fully responsible for both tax and tort liability for everything he does. Spider-Man is a good example, except when he’s working with the Avengers or the Fantastic Four, but pretty much any solo superhero/supervillain would fit.
Partnerships
Of course, many superheroes work together as part of a team, and that brings us naturally to partnerships. Partnerships come in several flavors, the most basic of which is a general partnership. General partnerships are basically the same as sole proprietorships except that there’s at least two people involved. A general partnership is an association of two or more people or entities to carry on a business for profit as co-owners. 3 The association is only a contractual association and can be demonstrated by a written agreement, oral agreement, conduct, or some combination of the three. 4 The parties must also intend to carry on the business as co-owners, which generally requires the parties must intend to share both the profits and control over the business, though this does not require equal sharing. 5 Finally, especially important for superhero teams, the parties must intend to make a profit, though the business does not need to actually earn any profits or income so long as it is set up with the intention of being a commercial enterprise. 6 If the parties do not intend to make a profit, such as an unincorporated nonprofit association, they cannot meet the requirements of a general partnership. 7
A general partnership is the “default” business entity, meaning it is the business organization that results where parties do not make any filings with a state electing an alternative business form. 8 All partners have equal authority to bind the partnership, and all partners—including their personal assets—are on the hook for any contract, debt, or tort related to the business and activities of the partnership. 9 One advantage of a partnership is that it enjoys what is known as “pass-through taxation.” That is, the partnership itself does not pay income tax, though it must still file an annual information return. Instead, it “passes through” any profits or losses to its partners, who then pay any required income tax. 10 Some other kinds of business entity, such as C corporations, must pay corporate income tax first in addition to the taxes paid by the employees or shareholders.
For example, the Green Lantern and Green Arrow’s association looks a lot like a general partnership, in that they seem to work largely as equals, and neither one of them is really capable of ordering the other around, at least not in terms of their joint activity. Like most superhero teams, however, they aren’t trying to make a profit, which means they definitely would not qualify as a partnership. If they wanted to form a business entity they would have to choose something else, and we’ll talk about those options later in this chapter.
Then there are limited partnerships. Unlike general partnerships, which are implied by default, limited partnerships are created by filing a certificate with the state government where the partnership wants to be registered. 11 These entities are composed of one or more general partners who are just like partners in a general partnership, and one or more limited partners. Limited partners have an ownership interest in the partnership but no control over its assets or business activities. Unlike general partners, limited partners are not liable for the debts of the partnership beyond their investment. Like general partnerships, limited partnerships must be for-profit. Taxation works the same as in other kinds of partnership. Limited partners can be employees of the partnership, and would be liable for their activities as employees just like any other employee of any other entity, but as long as the limited partners do not exercise too much control over the business, they remain immune from liability for the actions of the general partner and of the partnership as a whole. 12
Batman and Robin are iconic superhero partners, but they probably aren’t a general or even a limited partnership. Batman definitely calls the shots. He owns the Batcave, he supplies all the gear, he pays all the expenses. Robin looks for all the world like some kind of limited partner, but limited partnerships aren’t something courts are going to recognize without the proper filings, and Batman and Robin aren’t a for-profit organization in any case. Instead, a court would probably recognize some kind of employer-employee relationship between Batman and Robin. Batman would be liable both for his own actions and for those actions Robin takes on his behalf, 13 but Robin wouldn’t be liable for what Batman does, because Batman is really the one in charge.
The Fantastic Four, by contrast, are probably one of the few examples of a superhero team that could qualify as a partnership because they each have a more or less equal say in how the team is run and they actually take in money, primarily through Reed Richards’s inventions. A partnership is probably not the ideal business organization for the Fantastic Four (more on that later), but at least it’s an option.
There are other kinds of partnerships, such as limited liability partnerships (LLPs). LLPs emerged in the early 1990s in the wake of the real estate bust of the 1980s. Cascading bank failures and cratering asset prices left investors with few other options than to go after the attorneys and accountants who had helped structure the deals that had gone south. This isn’t necessarily a bad thing: someone who signs off on a deal that, in hindsight, is obviously flawed, should probably be held accountable. But what about other professionals in the partnership who had nothing to do with the transactions in question? Remember, in a general partnership, which almost all professional firms were at the time, every partner is personally liable for the actions of every other. The prospect of sending thousands of innocent professionals and their families into bankruptcy was sufficiently distasteful to encourage most state legislatures to pass acts permitting the creation of LLPs. In an LLP, there are no general partners, and each partner is only liable for his or her own wrongdoing. Like other partnerships, LLPs enjoy pass-through taxation. That is, the LLP itself does not pay income tax. Instead, the income is only taxed when partners collect it. Like limited partnerships, LLPs aren’t something a court is going to read into a liability situation.
There are also more exotic forms of partnership like limited liability limited partnerships (LLLPs), but that’s starting to get pretty far into the weeds. We turn instead to the other major kind of business entity: the corporation.
Corporations
Another potential option for our heroes would be a corporation. Corporations are creatures of statute, created by filing papers as required by state incorporation laws. Every state has its own incorporation statute, but the statutes are not uniform. Some states have favorable incorporation laws and thus attract a lot of filings, historically Delaware, but more recently Nevada and a few others. Delaware has such a head start here that more than 50 percent of publicly traded companies in the U.S. are Delaware corporations. 14 But regardless of where they are created, corporations share some basic common features. First, they all offer limited liability. It is very difficult to hold the owners (i.e., shareholders), directors, officers, or employees of a corporation personally liable for the actions or debts of the corporation.
Doing so is known as “piercing the corporate veil” and is very difficult to pull off in the courts. 15 The limited liability protections of limited liability partnership entities are borrowed from this corporate concept.
Many state corporation acts also provide an option for incorporating as a not-for-profit (also sometimes referred to as nonprofit) corporation. Unlike typical corporations, profits from not-for-profit corporations are not distributed to the shareholders, but are instead used by the corporation for its own purposes. The ability to operate as a not-for-profit is extremely useful for many superhero teams, most of which do not seek to earn a profit or even have income, although they may own assets such as a headquarters or vehicles. There are generally two major steps to creating a not-for-profit corporation: first, incorporating under state law and second, applying for exempt status with the Internal Revenue Service. 16
Corporations have two general options for taxation. “C” corporations are taxed “twice”: first, at the corporation income tax level and second when the profits are distributed to the shareholders as dividends. “S” corporations, named after subchapter S of the Internal Revenue Code, have “pass through” taxation like partnerships, but there are limits on ownership, including the number of shareholders and their citizenship (no foreign shareholders for S-corps). The vast majority of big publicly traded corporations are C-corps. Not-for-profit corporations, assuming they meet the requirements to qualify as a not-for-profit under federal and state laws, are exempt from federal corporate income tax and, in most states, state corporate income tax as well. Individual states and municipalities may also offer exemptions from other taxes, such as sales tax and property tax, for not-for-profit corporations.
The most frequently encountered not-for-profit corporations qualify for tax-exempt status under §501(c)(3) of the Internal Revenue Code. To qualify as a 501(c)(3) not-for-profit entity, the corporation must be organized and operated exclusively for one of the exempt purposes listed in this section of the code: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. 17 “Charitable” is used in its generally accepted legal use and includes “relief of the poor, the distressed, or the underprivileged…lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.” 18 Many superhero organizations could qualify under one or more of those provisions, particularly “lessening the burdens of government” and “defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
However, there are important restrictions in the amount of political campaigning and legislative or lobbying activities that a 501(c)(3) not-for-profit corporation can engage in, which may be relevant to a superhero organization that opposes a law such as the Superhuman Registration Act or which opposes an anti-mutant candidate for office. We’re afraid that the finer details of nonprofit and campaign finance are beyond the scope of this book, however.
Limited Liability Companies
Regular corporations are not the only kind of corporate form. Limited liability companies are an increasingly popular alternative to regular corporations in many contexts. Like corporations, LLCs are defined by state statutes, and there are variations in the statutes from state to state. LLCs are a rather unique “hybrid entity,” in that they have limited personal liability like corporations, but have the option of being taxed like a corporation, a partnership (i.e., pass-through taxation), or, for single-member LLCs, the entity can be disregarded for tax purposes. Through this combination of limited personal liability and partnership taxation, and without the restrictions on membership that S-corporations have, the LLC can provide advantages unavailable to corporations, partnerships, or limited partnerships. LLCs can have a single or multiple members, and most states permit all members to participate in the management and control of the company without the member losing their limited personal liability. 19 As an alternative method of control, many state statutes also allow the LLC to appoint one or more managers to control the business of the company. 20
LLCs are also comparatively easy to set up in most states and often require fewer corporate formalities or annual filings, which makes them appealing for superheroes who are looking for a corporate structure where they do not need to publicly disclose as much information. The LLC is typically formed by filing articles of organization with the state government. 21 The owners of the company (called “members” of the LLC) can, or in some states must, create a written operating agreement that sets forth the rules governing the business, not unlike the Avengers’ charter. 22 Several states have also recently allowed the creation of low-profit or not-for-profit limited liability company statutes, which may be of particular interest to superhero organizations. 23
The question then becomes which of the above would be best suited for something like the Avengers or the Justice League?
Choosing a Business Organization
As a first order question, we should probably ask whether our organization is going to be part of the private sector at all. Since the Civil War event in the Marvel Universe, the Avengers are organized under the auspices of the federal Fifty State Initiative and thus probably don’t need to have any kind of corporate entity. But prior to that they were a private group funded by Tony Stark through the Maria Stark Foundation, his personal not-for-profit. 24 The Justice League’s origins are a little harder to discuss with any kind of certainty due to the frequent and conflicting retcons DC has had over the past few decades, but it seems plausible that the group could have alternated between public and private at various points in its history. The Fantastic Four almost certainly have (or should have) a business organization that leases the Four’s headquarters, owns its vehicles and other assets, and takes in income and pays the team members.
Anyhow, what form are we going to choose? The heroes certainly seem to act like they’re partners much of the time, but here’s the thing: One of the biggest reasons to be a partnership rather than a corporation has to do with taxes, as corporations have a higher income tax rate than individuals. True, multinational companies are infamous for coming up with zero or even negative tax liabilities despite record-breaking profits, but you need to generate way more revenue than most of our superheroes ever do, even working together, to achieve that kind of silliness. Those sorts of manipulations involve complicated accounting practices related to expenses, capital depreciation, and shifting revenue to overseas subsidiaries, which just aren’t relevant here. Since most superhero teams have no income—and thus would pay no taxes—why not be a regular corporation? The limited liability protection would certainly be nice, right?
Well, for one thing, corporate governance is kind of a pain in the neck, which is the other reason many small businesses are partnerships or LLCs: doing anything as a corporation just involves more paperwork. It’s hard to imagine Superman and Wonder Woman sitting down in the boardroom deciding whether they, together, have enough shareholder votes to get the League to do a mission they support or whether they need to bring in someone else, maybe giving him additional control of…It’s boring just thinking about it! Luckily, comic book writers can happily gloss over those messy details.
Partnerships are significantly less formal. Partners can act independently, and if they don’t get along, hey, that’s the end of it. Each is more or less capable of taking his ball and going home, particularly when said ball doesn’t involve messy, illiquid capital investments such as a headquarters or vehicles. The problem is that most superhero groups aren’t profit-seeking organizations, which means they can’t organize as a partnership of any kind.
An LLC could suit many superhero organizations quite well. Only a few states require that LLCs be for-profit businesses, and some states even explicitly recognize not-for-pr
ofit LLCs. In a state that does not require LLCs to be for-profit, a regular LLC that isn’t trying to make a profit simply won’t get the tax benefits of being a not-for-profit. LLCs also have the advantage of being easy to set up and easier to run than corporations, but provide the similar liability protections, unlike partnerships. As a result, an LLC is a good choice for most superhero teams, especially smaller ones like the Fantastic Four and the Justice League.
The Avengers, however, are not an informal group. They own bases and vehicles, have a large operating budget, and employ numerous superheroes and regular employees. Rather than a partnership of more or less equals, like the Justice League, the Avengers have a hierarchy organized along traditional company lines. As a result, a regular corporation or LLC likely suits them best.
Superhero Corporations and Liability
Of course, for some superheroes the question of involvement with a corporation is not a hypothetical one. The Fantastic Four, Bruce Wayne, and Tony Stark all have ties to companies, and this naturally raises questions about whether the superheroes’ actions could affect their respective businesses—and vice versa!