External entities and internal aggregates: a deconstructionist conundrum.

• Author: Rutledge, Thomas E.

"[N]ihil esse rem publicam, appellationem modo sine corpore ac specie." (2)

Today the goal of many physicists, whether working with what are some of the largest machines ever built such as the newly christened Large Hadron Collider or with the rather more simple chalk and blackboard, is to develop a single unified theory that will explain the characteristics of the most elemental particles and integrating the four elemental forces, bringing together Heisenberg's Quantum Theory (3) and Einstein's General Relativity. The law of business organizations lacks a similar goal of unification. Rather, we find ourselves continuously mixing, sometimes matching and sometimes not, aspects of business entity law, adding or removing features to various forms of organization without the benefit of a conceptual framework as to whether, across the range of business organization forms, we have made or are making progress. Now the question of "progress" must be distinguished from "motion," and I submit that it, at a minimum, needs to be debated whether the mixing and recombination of features has been motion without a preconceived determination of what will be progress.

Much is made when discussing the limited liability company (the LLC), the modern partnership, and the limited partnership, the latter two being business forms driven into existence by the need to maintain relevance in a world now containing the LLC, of certain immutable characteristics of unincorporated business organizations. As a result of its being an unincorporated business organization, "an LLC must have this characteristic or that characteristic" has been oft uttered as a guiding principle. But what justification exists for the admonition made that this or that characteristic "must" be present in order that the LLC (or partnership or limited partnership) may be an "unincorporated" business organization? In fact it has been all too little, if any. (4)

At the same time, we have seen the express characterization of these new business forms as "entities," most strikingly in the statement contained in the Revised Uniform Partnership Act (RUPA) that "[a] partnership is an entity distinct from its partners." (5) But what is the meaning of this categorization? What characteristics and attributes flow from being an "entity"? Conversely, what is the combination of characteristics and attributes that have been incorporated into the traditional structures that now justifies an "entity" categorization? As is the case with what it means to be "unincorporated," too little consideration has been given to our utilization of "entity." (6)

The objective of this essay is to investigate what, in a deconstructionist sense, (7) are the intrinsic meanings (if any) of the terms "unincorporated" and "entity." From there, the question will be whether those terms, applied in the law of business organizations, have substantively contributed to the development or rather served as a crutch supporting unclear thought. It is my conclusion that the latter is the case and that the identification of certain forms of organization as an "entity" has not clarified or contributed to the characteristics of those structures so labeled. Furthermore, the essential features that have distinguished unincorporated from incorporated forms have been, at minimum, narrowed. For those reasons, the purported categories have little continuing viability as means of distinction.

THE POVERTY OF MAKING ASSESSMENTS BASED UPON DEFAULT RULES

There is a certain poverty in an analysis of this nature as it is driven by the default rules of the various business organization forms, those rules that apply unless and until the participants in a venture "otherwise provide" either in a written agreement or, where permitted, by an oral or course-of-conduct agreement. The various business organizations acts impose to different degrees a requirement that departures from the statutory default rules be in writing. At one end of the spectrum is the general partnership that has not elected to be a limited liability partnership. In that instance there is no requirement that any aspect of the partnership agreement be in writing, (8) and there is no requirement that a written instrument be filed with the state either to enable or to memorialize the formation of the partnership. (9) The various LLC acts provide differing degrees of a statute of frauds requirement. For example, LLC acts require the filing with the Secretary of State of written articles of organization/formation, which filing is a precondition to the organization of the LLC. (10) Under some of the statutory formulae employed, there exists no further requirements of a writing, (11) although even in that absence there is often a requirement that any additional capital contribution obligations, in order to be enforceable, be set forth in writing. (12) Various states, on an individual basis, have imposed statute of frauds provisions with respect to individual rules employed in the act, mandating that any departure therefrom be in a written instrument. (13) Each business corporation act contemplates articles or a certificate of incorporation, the filing of which is a precondition to the organization of the corporation (14) and further requires that certain departures from otherwise applicable rules be set forth in that written instrument. (15) It is contemplated that each corporation will adopt by-laws, with it being either expressly provided, or at least strongly implied, that such will be set forth in a written instrument. (16)

Notwithstanding the differing rules as to the requirements to do so, with few exceptions, the default rules of the various acts are subject to modification by private ordering. As a general rule, there is at least the expectation that there is a greater degree of modifiability permitted in unincorporated business organizations than in business corporations. For example, in the Delaware LLC Act, it is possible to modify, or even eliminate, all of the fiduciary duties. (17) The rules governing the business corporation are more restrictive; although it is possible, ab initio, to waive the duty of loyalty as embodied in the business opportunity doctrine, (18) it is not possible, outside of modifying the standard of culpability permitted by the Delaware Business Corporation Act, (19) to lessen or eliminate the standard of care applicable to corporate directors. Still, when we discuss and compare various forms of business organizations, the typical practice is to review them vis-a-vis their default characteristics. For example, we describe the LLC (and generally speaking, the other forms of unincorporated business organizations) as embodying the rule of "pick your partner," meaning that the right to transfer the management interest in the venture is circumscribed by the requirement that the other participants in the venture consent to the transfer. This, however, is simply a default rule, and it is possible--and, in some applications, indeed common--to provide that the interest in the venture, including the right to participate in management, is freely transferable and does not require the approval of the other participants in the venture. Conversely, one of the hallmarks of the business corporation is that the shares therein are freely transferable by the shareholder with the transferee, merely by that private ordering between the transferor and the transferee, becoming fully vested with all rights of a shareholder including those to participate in management through the election of directors and voting on organic transactions, to inspect corporate records, and to receive the benefit of the fiduciary duties owed by the board of directors. While that may be the prototypical rule, the vast majority of all corporations are closely held, and in a substantial portion of them the shareholders have entered into a share restriction agreement limiting the ability of a stranger to become a shareholder. The substantive effect of the charging order, a creature of the law of partnership law appearing in limited partnership and LLC law, (20) may be achieved in the business corporation with a share restriction agreement. (21) Consequently, any discussion of the characteristics of the corporation, the partnership, the limited liability company or any other business structure that does not, by statute, embody mandatory inalterable rules is necessarily limited.

"UNINCORPORATED": WHAT, IF ANYTHING, DOES THAT MEAN?

Beginning with the LLC and since applied across most other significant unincorporated business organizations, (22) the distinctions between the incorporated and unincorporated realms have been steadily reduced. (23) What then is left, if anything, of the distinction between "incorporated" organizations--including corporations, cooperatives, and associations (24)--and unincorporated organizations? The 1928 Model Business Corporation Act (MBCA) defines an "unincorporated" association as "any group of two or more persons united to carry on a business for profit except when such group is formed into a corporation under the laws of any state, territory, nation, or sovereignty. Without hereby restricting the meaning of the term, it is declared to include partnerships, limited partnerships, limited partnership associations, joint stock companies, and business trusts." (25) For our purposes, it is not enough to resolve whether an organization is "incorporated" by determining whether that label is utilized in the statute; were we to do so, then deleting the term "incorporated" from the MBCA (26) would mean that the prototypical corporation is not incorporated. Rather, we must determine what aspects of a form of organization render it "incorporated" so as to provide information to distinguish that category from those that are unincorporated. (27)

There is not complete agreement as to the fundamental characteristics of an "incorporated" business organization...