TABLE OF CONTENTS INTRODUCTION I. FIFTH AMENDMENT JURISPRUDENCE II. THE COLLECTIVE ENTITY DOCTRINE A. Evolution and Summary of the Collective Entity Doctrine 1. Incorporated Versus Unincorporated Persons 2. Independent Institutional Identity 3. Strict Maintenance of Business Records Not Constituting Personal Papers B. The Open Issue: The Availability of the Fifth Amendment Privilege for Single-Member LLCs Post-Braswell III. THE SINGLE-MEMBER LLC A. The Origin and Business Features of the Single-Member LLC 1. Background on the LLC as a Business Entity 2. State LLC Acts, the Revised Limited Liability Company Act, and the Revised Prototype LLC Act 3. Benefits of a Single-Member LLC 4. Disadvantages of a Single-Member LLC B. The Independent Fifth Amendment Right of the Single-Member LLC 1. The Hybrid Business Features of the Single-Member LLC Are Problematic for the Collective Entity Doctrine 2. The Single-Member LLC in Light of the Beilis Exception 3. The Fifth Amendment Rights of the Single-Member LLC Post-Braswell IV. COUNTERARGUMENTS A. The Corporate Aspects of the Single-Member LLC Trigger the Collective Entity Doctrine B. The Use Immunity Solution C. United States v. Kordel and the Appointment of an Innocent Agent CONCLUSION INTRODUCTION
Julie recently opened The Bodos Shop, a bakery on Richmond Road in Williamsburg, Virginia. As a sole business owner, Julie chose to form a single-member limited liability company (LLC), as this is the only type of business entity that may be owned and operated by a single, natural person while simultaneously allowing for taxation of business profits at individual rates. There are no other employees of The Bodos Shop, and there are no other individuals sharing management functions. Only Julie's name appears on the organizational documents, and Julie is her own bookkeeper.
Unfortunately, one month after the bakery's grand opening, Julie began to experience financial difficulties and fierce competition from the many pancake houses in town. To remain in business and minimize her income tax liability, Julie decided to fudge a few numbers on her income tax return.
One year later, Julie received a subpoena from the Internal Revenue Service (IRS) addressed to The Bodos Shop. The subpoena requested production of the bakery's financial records and testimony from The Bodos Shop's custodian of records. Julie learned that the IRS was investigating her for willful subscription to a false tax return. Believing that by adhering to the subpoena request Julie would be incriminating herself, Julie notified the IRS that The Bodos Shop would be invoking the Fifth Amendment. This sort of factual situation begs the following question: Is The Bodos Shop--comprised of a single, natural person--entitled to invoke Fifth Amendment rights?
The Fifth Amendment to the Constitution provides that "[n]o person ... shall be compelled in any criminal case to be a witness against himself." (1) While the Supreme Court has held this privilege to be purely personal, (2) and thus unavailable to artificial entities such as corporations, (3) the applicability of the Fifth Amendment to a single-member LLC remains uncertain. (4)
The LLC is a form of business organization that offers its members the pass-through federal income tax treatment of a partnership, while also shielding the owners from personal liability for the obligations of the business. (5) Unlike other types of business entities, there are no requirements specifying the maximum or minimum number of owners. (6) This Note focuses on the relationship between the Fifth Amendment and single-member LLCs. (7)
In their article entitled The Single-Member Limited Liability Company as Disregarded Entity: Now You See It, Now You Don't, Professors Daniel S. Kleinberger and Carter G. Bishop commented that "[t]he sole member of [a single-member limited liability company] might ... say, 'the entity, it's me.'" (8) Under that rationale, if Julie and The Bodos Shop are one and the same, then the bakery must be allowed to seek Fifth Amendment protection. (9) While the legal rights of single-member LLCs are still largely undeveloped (10)--and existing scholarship and court precedent focuses almost exclusively on the rights of corporations (11)--the Supreme Court left open the possibility for single-member LLCs to avail themselves of the Fifth Amendment in two different cases: derivatively in Bellis v. United States, (12) and explicitly in Braswell v. United States. (13)
On the whole, the debate concerning the applicability of constitutional rights to various types of business entities has received varying amounts of judicial attention over the years. In 2010, the Supreme Court brought this constitutional quandary back into the spotlight by holding in Citizens United v. FEC that campaign finance spending was a form of protected First Amendment speech and that the government could not prevent corporations from attempting to persuade voters by funding political advertising. (14) This decision sparked an ongoing conversation about whether corporations should be able to claim other constitutional and statutory rights as well. (15) For example, research scholar Professor Kent Greenfield argues that corporations "should not ... receive all the constitutional rights that you and I can claim. Corporations cannot vote or serve on juries.... [I]t does not make sense to think of corporations asserting those rights, both because of the nature of the right and the nature of the corporate entity." (16) Yet, the Supreme Court has clearly held that corporations are permitted to invoke the First Amendment (17) and are guaranteed Fourth Amendment protection. (18) 19 Furthermore, the Supreme Court has held that for-profit, closely held corporations are "persons" under the Religious Freedom Restoration Act (RFRA) and may thus exercise religion. (19) While scholars such as Professors Alan Meese and Nathan Oman endorse this conception of the corporation, (20) others remain unpersuaded. (21)
Although the Supreme Court has held certain constitutional privileges applicable to corporations, (22) historically the Court has opposed extending Fifth Amendment rights to artificial entities. (23) In fact, the Supreme Court has made clear that Fifth Amendment protection is irrefutably unavailable to corporations. (24) As such, debate over the Fifth Amendment rights of corporations has significantly subsided in the last decade. In the 1980s, scholars such as Professor Robert Mosteller wrote that "the question is certainly an intriguing one. Indeed, because the Court has extended the warrant requirement of the [F]ourth [A]mendment to corporations, it is far from clear why corporations should not be granted [F]ifth [A]mendment rights as well." (25) Today, however, this important issue sparks less controversy. Perhaps this is because many legal minds believe that the Court's decision to refuse corporations a Fifth Amendment privilege "makes sense, since corporations could otherwise evade all kinds of disclosure obligations necessary to make markets work," (26) or perhaps because Supreme Court precedent has now become widely accepted as the status quo. (27)
Whether single-member LLCs can seek Fifth Amendment protection, however, is less settled given the gap in Supreme Court precedent. (28) Lower courts have been quick to analogize single-member LLCs--and LLCs in general--to corporations or partnerships, (29) and consequently have refused single-member LLCs--and LLCs in general--the constitutional right against self-incrimination. (30) However, from a business entity standpoint, treating single-member LLCs as corporations is an oversimplified solution with grave consequences. (31) Furthermore, from a constitutional standpoint, denying single-member LLCs this privilege impacts the sole owners in a manner inconsistent with the spirit of the Fifth Amendment. (32) Oftentimes, the impetus for this denial is a lack of understanding of the single-member LLC's unique hybrid business structure. (33)
The unique business structure of the single-member LLC is best analogized to the churkendoose--"part chicken, turkey, duck and goose"--which Ben Berenberg introduced to the world in his 1946 children's book. (34) In 1977, with the advent of the LLC, Wyoming created a churkendoose business entity--"part corporation, part general partnership, part limited partnership." (35) As noted by Professor Kleinberger, this "churkendoose has revolutionized the law of business organizations, becoming the vehicle of choice for tens of thousands of ventures every month and causing the IRS to radically overhaul its approach to taxing business entities." (36) As touched upon previously, and as explained in further detail in Part III.A.3, the business structure of the single-member LLC gives its owners corporate-style limited liability, partnership-style taxation, and sole proprietorship-style freedom of ownership. (37) Furthermore, as gleaned from the introductory hypothetical, single-member LLCs and their natural owners are inextricably intertwined, creating a host of unique Fifth Amendment issues not present in the context of a traditional corporation. (38)
This Note focuses on the intersection between the single-member LLC and the Fifth Amendment. It argues that single-member LLCs should be permitted to independently invoke the Fifth Amendment because any holding to the contrary would jeopardize the single-member's constitutional right against self-incrimination. Part I provides a background on Fifth Amendment jurisprudence and the values thereby contradicted when single-member LLCs are denied Fifth Amendment protection. Part II summarizes the Supreme Court's collective entity doctrine and evolving framework. Part III explores the single-member LLC as a corporate form and concludes that this unique business entity falls under either the Bellis or Braswell Supreme Court exceptions to the collective entity doctrine. (39)...