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.