The Implications of Modern Unincorporated Entities Beyond Business Law

The modern American law of unincorporated business organizations presents surprising possibilities for the creative transactional lawyer. In a new paper, ‘Business Law Beyond Business’, forthcoming in the Journal of Corporation Law, I demonstrate that these new capabilities have implications beyond just business law.

The modern unincorporated organization—the limited liability company, or LLC, is the best example because it is the most flexible—is something unknown to classical corporate law. Like a classical corporation (versus a partnership), it is a legal entity with the power to act legally in its own right—to own property, enter contracts, be an agent, be a principal, sue, be sued, and so forth. Much like a classical partnership, its organizational structure is very flexible; indeed, modern LLC statutes impose very few restrictions on the internal governance of LLCs. Interests in LLCs are also personal property, much like shares of corporations.

Taken together, those three building blocks—legal-entity status, extremely flexible organization, and the creation of property rights at will—provide a surprising range of tools for transactional lawyers. As I have shown in previous articles and a book called ‘Autonomous Organizations’ (forthcoming later this year from Cambridge University Press), perhaps the most surprising and far-reaching capability of modern LLCs is to give something that closely resembles legal personhood to artificially intelligent software. But LLCs provide a variety of less provocative but still potentially very useful new capabilities.

Some of these capabilities are relatively straightforward and result mainly from the ability to create property interests backed by a flexibly structured legal organization. For example, perhaps a company has an economically significant asset (like data) but the company’s legal system does not recognize the asset as legal ‘property’. This may limit the company’s ability to unlock the value of the asset; for example it may limit the company’s ability in some legal systems to pledge the asset formally as security for a loan. The company, however, can create an LLC that controls the data and then use membership interests in the LLC as security for a loan. This possibility is seemingly mundane—just a shell game involving shell companies—but it serves as a transactional technique that can effectively import something that is not recognized as legal property into the legal-property system.

Modern business organizations like LLCs also open several new human and humane possibilities for individuals. For example, at least in American agency law, even individuals who lack legal capacity (say, because of age-related cognitive impairment) to act in their own right can serve as legal agents of an organization. Letting a person with diminishing capacity serve as an agent of a flexibly structured LLC is a way to give that person autonomy over limited assets (in the LLC) while making it easier for them to accept the loss of legal autonomy for the rest of their affairs (in order to protect their assets that have not been moved to the LLC). For example, maybe someone with limited capacity for independent decision-making is comfortable setting up an arrangement under which they can spent recurring but limited income from a pension as they see fit while accepting a determination of incapacity that would prevent them from selling real-estate or other more significant assets that remain in their name. The point is that LLCs provide a way to impose controlled, agreed limits on a person’s legal capabilities by permitting their independent power to make decision to affect only the affairs of the LLC rather than their own legal affairs more generally. In this way, business entities may serve an important role outside business law—here, to enable new forms of ‘supported decision making’, a movement that aims to provide an intermediate ground between full legal personhood and total legal incapacity.

LLCs, because they can be controlled by strong, hard-to-amend operating agreements, also provide credible ways for individuals or companies to make legally binding commitments without the legal involvement of preexisting third parties. It is generally understood that people cannot make binding contracts with themselves. But, for example, a firm that wants to make a credible public commitment can create an LLC that is legally bound to enforce a contract with the firm, and at least in principle, this commitment need not require the involvement or acquiescence of any separate party.

Flexible companies also make it easier for people to get around ancient legal restrictions in the private law. For example, in American contract law, pure donative promises—that is, simple promises to give gifts, without some other factor (like reliance) that leads to enforcement—are understood generally to be unenforceable. The clever use of LLCs can make certain promises enforceable when they otherwise might not be. Similarly, sophisticated uses of LLCs can probably enable grantors of property interests to get around many restrictions in the law of property—like the ancient rule against perpetuities (where it still exists) and restraints on alienation.

Effectively, the policies of ‘freedom of contract’ recognized in LLC law tend to be able to supersede legal restrictions on the flexible assignment and disposition of property imposed by other areas of law. This leads to a tension that the law has not fully resolved, but at the very least it means that setting up a transaction that uses an LLC can increase the likelihood that the drafter’s intent will be legally binding. Accordingly, even transactional planners working in areas that are not traditionally thought of as areas of ‘business law’ should become familiar with modern American LLC statutes because they can be an exceedingly versatile building block for creative modern transactions. Given the capabilities of LLCs, it is perhaps almost surprising that most American law students have significant exposure to corporate law and relatively little exposure to the details of closely held organizations.

Shawn Bayern is the Larry & Joyce Beltz Professor and Associate Dean for Academic Affairs at the Florida State University College of Law.