Superhero Organizations and Business Entities

One question that has come up a number of times is what kind of business entity would be best for superhero organizations like the Avengers or the Justice League. This was a bit too much for a mailbag, so here’s a full-length post on the subject.

To discuss this adequately we’ll have to take a brief look at the different kinds of business entities and their pros and cons.

I. Partnerships

The most basic kind of business entity is the sole proprietorship, but as they by definition only involves one person, they aren’t going to fit for our purposes. Very briefly, sole proprietorships are what happens when a single individual goes into business for themselves and doesn’t create any kind of business entity. They are completely 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. Any business income is treated like personal income for tax purposes.

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. All partners have equal authority to bind the partnership, and all partners are on the hook for any debt or tort related to the activity of every other partner, including their personal assets. If two people act in concert without providing otherwise, the courts will treat this as a general partnership by default.

Then there are limited partnerships. These 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 and are not liable for the debts of the partnership beyond their investment. Because this is a different and not immediately obvious way of doing business, most states require that limited partnerships register with the government and file papers if the organization or membership of a limited partnership changes. Taxation works the same as in other kinds of partnership.

Limited liability partnerships (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 which, in hindsight, is obviously flawed, should probably be held accountable. But what about other professionals in the firm 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. The LLP itself is not taxed. Income is only taxed when it is collected by partners.

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. It’s possible to make some suggestions for our heroes already, but we’re only halfway there.

II. Corporations

So much for partnerships. The other main option for our heroes would be a corporation. Corporations are creatures of statute, created by filing papers as directed by state incorporation laws. Every state has their own incorporation statute, but they aren’t 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 something like 50% of publicly traded companies are Delaware corporations. 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 it is highly disfavored by the courts. Basically, the operators of the corporation need to completely disregard the corporate form—co-mingling personal and corporate funds is a classic example—before a court is going to permit personal liability. The limited liability protections of the various partnership entities are borrowed from this corporate concept.

Corporations have two options for taxation. “C” corporations are taxed before distributions are made to shareholders while “S” corporations 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 corporations are C-corps.

There are other corporate forms—including the increasingly popular limited liability company (LLC)—but again, we’re trying to pick a business entity for our superheroes, not write a treatise on corporate law. The question then becomes which of the above would be best suited for something like the Avengers?

III. Discussion

As a first order question, we should probably ask whether our organization is going to be part of the private sector at all. S.H.I.E.L.D., for example, is some kind of government agency. Government agencies aren’t corporations at all, they’re departments of the government. 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 non-profit. 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.

Anyhow, what form are we going to choose? The heroes certainly seem to act like they’re partners a lot 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, American multinationals 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 involved complicated accounting practices related to expenses, capital depreciation, and shifting revenue to overseas subsidiaries, which just aren’t relevant here. So as taxes aren’t really part of the picture, why not just be a corporation? The limited liability protection would certainly be nice, yes?

Well, for one thing, corporate governance is, well, kind of a pain in the neck. Which is the other reason a lot of small businesses are partnerships: doing anything as a corporation just involves more paperwork. The shareholders are the ultimate owners of the corporation, but most decisions are made by directors who are appointed by shareholders, but sometimes not, and anyway, shares are usually apportioned among the shareholders in proportion to their monetary investment. The Justice League isn’t something into which Superman has invested anything beyond his name, efforts, and reputation, as far as we can tell. One does not really intuitively picture Superman and Wonder Woman sitting down in the board room deciding whether they, together, have sufficient interest in the corporation 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… look, it’s just boring. It’s almost impossible to write a gripping superhero narrative centered around internal corporate politics.

Partnerships are a lot more informal. 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, and most superhero groups don’t. So something like an LLP really is starting to look pretty good.

Except for one thing: why do we need a business entity at all? We aren’t talking about a business! All of these various entities involved to help manage the relationship of people who want to leverage their capital together, who are engaged in some at least potentially profitable cooperative enterprise. The Avengers, the JLA, the X-Men, none of these are about making money. They aren’t even necessarily engaged in traditional non-profit activities either. It’s debatable whether a court would even recognize an implied partnership given that there’s almost never any money on the table when superheroes work together, certainly not by third parties who might be potential plaintiffs.

Note, though, that some superheroes are involved in money-making enterprises (even if they are non-profit).  For example, many of the X-Men are involved in the X-Corporation and the Xavier Institute.  But those entities have a separate function from the superheroes qua superheroes, although there is occasional overlap.  We may revisit just what form would be most appropriate for these secondary organizations in a future post.

Ultimately, it seems likely that superheroes working together don’t necessarily need a business entity because they aren’t really dealing with much in the way of property.  Even when they do have significant property, like the Justice League Watchtower, it’s often located someplace outside the jurisdiction of any legal system.  Starting a business entity almost seems to invite personal liability where there probably wouldn’t be any by creating an official relationship between the heroes. Acting together without such an entity would probably limit liability to those actions in which a particular hero is directly involved, which is as it should be, intuitively. So interesting (or not) as all of this may be, most superheroes probably don’t need to spend too much time worrying about business formation.

34 responses to “Superhero Organizations and Business Entities

  1. But someone has to own the Quinjet, the HQ building, be the name on that HQs fire insurance policy, etc. So it seems that setting up some sort of legal entity to handle all that would make sense. This also make maintenance of secret identities easier for the whole group. how do organizations like the Shriner’s or Elks handle this, as they would seem to the the closest type of real world origination to a Superhero team.

    • Generally speaking the Quinjets were supplied by Iron Man, who could well own them outright as Tony Stark. The same could be true of the building. As far as I can tell Iron Man is the only member of the Avengers supplying any significant capital, so he could simply be letting the other team members use his stuff.

      That said, Tony Stark is no fool, and presumably he’d want to shield himself from personal liability if one of the other Avengers crashed a Quinjet into an orphanage or something. So some kind of holding company might be appropriate, probably an LLC. It might even try for 501(c)(3) status, which would make Stark’s contributions tax deductible.

  2. I agree with the principle that a business structure is kind of silly (though the JLA cave must be on someone’s property and wherever the League sits, they have that weird predilection for trophies–who owns them?). However, it’s worth noting that teams often do go through what appears to be serious governance.

    To continue with the Justice League example, in the early days, they kept rigorous case files (usually written by the latest member, Snapper Carr, or Wonder Woman, just like her counterpart did in the JSA), and they started many, many issues with formal meetings that sometimes involved discussion about whether they were dealing with a case.

    I doubt that would be a case of the League simply wanting to act out their anal retentive corporate fantasies, so maybe there’s something to the idea.

  3. You vastly overstate how complicated corporate governance needs to be.

    In the case of a closely held corporation (like the family business my wife works for), the directors *are* the shareholders – there’s no additional layers. There’s no boardroom meetings, the two majority owners (80% between them) just get together in their office now and again, for really complicated decisions or lengthy discussion they pop around the corner to a local pub and hash it out over lunch. The ‘annual meeting’ is generally the family 4th of July BBQ. Etc… etc… (My wife, as the CFO/Corporate secretary makes all the paperwork come out right, but it isn’t a big deal, consuming a few hours a month.)

    Not all corporation are megacorps – and their governance procedures reflect this.

    My guess is that if they (Avengers, JLA, etc..) did formally and legal organize themselves, they wouldn’t use any of the business models you discuss above – but one of the many types of organization under § 501 (c). (The governance of which can be amazingly simple.)

    • It’s true that corporate governance doesn’t have to be complicated, but it certainly can be. What’s more, a major shareholder or member of the board of directors (or someone who is both) can make things complicated for others.

      26 USC 501(c) does not describe business organizations as such. There’s an important distinction between the business organization and its tax exempt status, which is what 501(c) is about. Generally speaking, businesses are organized under state laws, though there are exceptions like the GSEs that are organized under specific federal laws.

  4. Assuming they have a reason to organize at all — say they merchandise thier stuff as discussed in other posts — an LLC seems the simplest, most functional way for the average superhero group. It’s is easier to qualify for than the S-corp suggested above, and is perhaps a little more flexible than the LLP’s because it could even be set up by one person but with provisions for adding new members as other superheroes come along. Granted, in some cases the company may have grown to the point of issuing stock and such, at which point it would have to become a corporation. Very few superhero groups seem to reach that level though.

  5. I’m not sure if Marvel hasn’t implicitly stated that the Avengers has been incorporated.

    http://www.whiterocketbooks.com/avengers/charter.html

    “The Avengers is hereby chartered as a non-profit organization under the laws as set down by the State of New York, United States of America; said organization being recognized and fully sanctioned as a peace-keeping force by the National Security Council of the United States of America, by the United Nations, and by the Supreme Headquarters International Espionage Law Enforcement Division.”

    “The Avengers organization may be disbanded only by order of the National Security Council for a breach of national security, or by unanimous vote of the entire active membership of the Avengers. In the event of disbanding, all Avengers properties and facilities shall revert to the Maria Stark Foundation and/or Stark International, with the exception of any security devices, analysis systems, or data which has any bearing on national security. Said materials and data shall be immediately turned over to the government of the United States.”

    The last paragraph seems to imply that the materials owned by “The Avengers” belong to “The Avengers” and not to Tony Stark. The Charter doesn’t state what liability The Avengers may have if any member of The Avengers were to crash a quinjet into somebody’s home, for example but presumably the Maria Stark Foundation would get sued because that’s where the money comes from.

    • Is that charter canon?

      “The Charter doesn’t state what liability The Avengers may have if any member of The Avengers were to crash a quinjet into somebody’s home, for example but presumably the Maria Stark Foundation would get sued because that’s where the money comes from.”

      Avoiding that is one of the main purposes of many forms of business organization. By setting up the Avengers as a separate organization, its investors (e.g. the MSF, Stark personally, etc) are shielded from liability beyond their actual investment. Consider if you owned stock in a public company and that company got sued. You generally wouldn’t be liable beyond the value of your shares in the company.

  6. Certainly with the Avengers we know there are bylaws, because they refer to them. There are membership size restrictions, for example.

    I think the same is true for the Legion of Superheros as well.

    • The Legion as presently written by Paul Levitz?
      Chartered under the laws of Earth and the United Planets. Said charter’s been printed and reprinted several times over the decades.

  7. Many charitable organizations that are not engaged in business in the usual sense are set up as corporations. Among the ones I have checked on are the American Red Cross and the Boy Scouts.

    • True, but both of them are still involved in moving large amounts of money around. The BSA has an annual budget of $665.9 million and the Red Cross $9.05 billion. It’d be silly to try to keep track of that much money and the tax issues on it without some kind of business entity.

      The Justice League, on the other hand, don’t actually seem to have revenue. Some of that may just be elided from the stories as boring–our heroes presumably have to eat now and then–but nothing like that kind of scale.

      • Who pays Jarvis? Oh and Avengers mansion had to have had other employees but we just never saw them.

      • Christopher Page

        I would imagine that there must be some amount of revenue from the licensing of team-related imagery, etc. Even if we assume, as seems likely, that members have at least the option of retaining ownership of their individual licensing rights, presumably there must be some entity that owns and controls the use of things like images of the team as a whole, the “Avengers” logo, the Avengers mansion, etc. I find it difficult to imagine that merchandising for the Justice League alone doesn’t generate revenue at least equal to that of a second-tier professional sports team. That’s assuming that none of the members chooses to license their imagery through the team, which in itself seems somewhat unlikely.

  8. So why would anyone (in the real world) choose one of the structures that don’t limit liability? Other than the bad reason of completely disregarding the possibility that the business could ever fail.

    • The main reason is paperwork. Any entity that needs to be registered to be created is going to have some kind of filing requirements, and the most robust liability shield–the corporation–has quite a number of them. That’s a pain, and depending on what you’re doing, it may not be worth it.

      For example, a lot of weathier families use limited partnerships as a wealth and asset management tool, particularly to avoid estate taxation. They’ll make the children limited partners in the family “business,” and slowly increase their share of the pie using the parents’ annual gift allowance. Because the general partner retains complete control over the partnership, the parents can still use and benefit from all of their assets, but when they die, the kids actually already own everything so there isn’t even necessarily much to put through probate. Because we’re really only talking about personal assets and investments, there isn’t much point in a liability shield.

      Historically, when society ran more on the basis of reputation than it does now, law firms and accounting firms–particularly the former–would be general partnerships as a sort of signal to clients that the partners were willing to put their personal assets on the line for their clients. Some of the big old firms in New York remained general partnerships for years after the shift to LLPs and professional corporations began for just that reason.

      But you’re right: almost every business, i.e. enterprise engaged in commerce, would be silly to run without some kind of liability shield. Which is why almost all of them use one, even if it’s an LLP.

  9. There are some areas where ‘superhero’ teams could be expected to do business, notably private military companies aka mercenaries. Though less common in comics currently, there were a few such groups during the extreme violence phase of the 90s. Sadly I know next to nothing about the structure of PMCs and I can only guess as their structure*.

    *And it is to my understanding that existing law may not be sufficient to properly regulate PMCs.

  10. How would the Fantastic Four be structured? My first thought was partnership, but I’m pretty sure I remember a line about incorporation, and that the team is funded through Reed Richards’ patents. So clearly there’s a revenue component going on there.

    The question of staff is interesting to me. Jarvis could obviously be employed by the Maria Stark Foundation. But how would the staff be hired and paid for an organization like the Justice League? I’m specifically thinking of the Justice League Unlimited cartoon, which showed staff on the Watchtower satellites. Would Bruce Wayne fund all that? Or would it be an governmental situation, kind of like the old Justice League Embassies in the comics.

    • Jarvis was a Stark employee from way back.

      http://en.wikipedia.org/wiki/Avengers_Mansion

      “When occupied, the mansion was originally the Stark family manor, until their only son, Tony Stark, inherited their fortune and soon took on the guise of Iron Man. He donated the mansion to the Avengers and had it financed through the charitable Maria Stark Foundation. It was primarily looked after by the Stark family butler, Edwin Jarvis, who not only took care of the mansion but also catered to the needs of the Avengers team.”

      Note that wikipedia posts are however not canon so if this contradicts anything we’ve seen in the comics then it would be considered wrong.

      • I still think it is a good question though. I mean, what if Jarvis thinks he deserves a raise or a bonus? What if he needs an advance on his pay? I guess he could go to Tony Stark but there’s probably somebody who operates the MSF on a daily basis. After all, there’s the whole matter of the stipends that were given out to Hawkeye, Tigra, She-Hulk, Spiderman, etc. Hawkeye continued to get a monthly stipend even when he was a reserve Avenger which meant that the cheque was being sent to his home address. Somebody had to write the cheque and mail it. I would imagine the MSF could employ as many as a dozen people what with having to pay for accounting, mansion grounds keeping, quinjet servicing, computer network managing and, yes, probably even a lawyer to handle issues like trademarks and liabilities. For example, in the Great Lakes Avengers Misassembled miniseries, the team was contacted by the Maria Stark Foundation and forced to change their name. Whether the MSF employs a lawyer full time or just contacted a law firm to represent them would be another question.

    • Maybe we can stick to post Crisis Justice League (although continuity changed again with Zero Hour). If the Justice League has “embassies” in other countries then could the Justice League be considered their own country and not actually part of the US in the same way that the Vatican isn’t part of Italy?

      Hell, for that matter, is the Catholic church (or any church) considered a business or corporation? There’s a lot of money involved. I assume that any church in the U.S. is automatically considered a charity which means you can donate money and get a tax deduction. Well, maybe it is not automatic. Can I donate money top a satanic cult and get a tax deduction? Separation of church and state would seem to imply that I should be able to.

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  13. So many of the superhero activities must be considered ultrahazardous – explosions, etal. First, a superhero is uninsurable on any level. (Imagine writing the fire policy on the old Fantastic 4 HQ when a principle employee regularly turns bursts into flame). Second, do we really want an Incredibles dystopia where superheroes get sued into the underground? There would have to be special legislation or else no one would willingly fight crime. The police can shoot people because we, as a people, have voted for laws that give them qualified immunity. If we don’t make such laws then no one would do it.

  14. What about the trademarking? Superman has a logo and branding, and a safe manufacture wanted to use the logo for sales? Someone has to own the rights to the trademark.

    (Not a problem in marvel universe, mutant telepaths have ways of making you forget.)

  15. From the very bottom of the homepage of the Guardian Angels:
    “The Alliance of Guardian Angels, Inc. is a 501 (c)(3) non-profit organization| ©2010 The Alliance of Guardian Angels, Inc.”

    Both the Avengers and the Guardian Angels engage in similar activities, and have a similar need for protection from liability. The only problem I could see for the Avengers is that 501 (c)(3) status requires that you disburse a certain percentage of the money that comes in to your organization in donations every year. I am not sure how this would work with the Stark foundation/merchandising.

    Assuming that the Avengers could get “saving the world from evil creatures/masterminds” recognized as a form of community service, I think they will be alright.

    • There are several 501(c)(3) exempt purposes that the Avengers and other superhero groups might qualify under, including “relief of the poor, the distressed, or the underprivileged, lessening the burdens of government, defending human and civil rights secured by law, and combating community deterioration and juvenile delinquency.”

  16. I seem to remember that Superman, as well as the JLA itself, licenses the names, logos, likenesses etc of various heroes and uses the revenues to finance various charities. Furthermore this would be complicated by Wonder Woman’s (once and maybe future) status as a legal ambassador to the united states.

  17. How superheroes organize is one thing. Can you imagine the difficulty of organizing something like Hydra? Cobra? Or any of the other anti-hero groups?

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