In our last post, we discussed our framework for legal strategy called the five pathways. Today, we’d like to address how companies navigate within these pathways to attain the best results. As we mentioned in our MIT Sloan article, there is no one-size-fits-all approach to developing a legal strategy. Companies and industries are simply too diverse for such a simplistic solution. Instead, what we find is that legal strategy often is dependent on internal and external variables, such as company size, corporate culture, regulation, pace of technological change and the company’s maturity stage.
That is not to say, however, that a large and mature company in a regulated industry cannot cross the divide from risk management to a value creation pathway. One well established transportation company recently engaged in a strategic and cross functional (legal and finance) assessment of freight contracts to evaluate which ones to renew, cancel or negotiate. The company, which was operating at full capacity, changed its legal strategy to optimize its operations for the near and medium terms. This type of strategic contract assessment clearly fits within the value pathway.
To cross the divide and move from a risk management pathway (avoidance, compliance, prevention) to a value-enabling pathway (value and transformation) we suggest that C-level executives must view the law as an important and enabling resource for achieving strategic goals. This perspective requires a strong working knowledge of law, or legal astuteness, and organizational commitments such as the deployment of resources and authority to develop and test legal strategy.
Our research suggests that successful legal strategies require a champion, or what we refer to as a chief legal strategist. This is someone who is authorized by top management and recognized across the organization as the point person for driving legal strategies. Sometimes that individual is the general counsel, such as Twitter’s former chief legal officer, Alexander Macgillivray, who once stated that fighting for free speech is more than a good idea, it is a competitive advantage for the company. We find, however, that an associate general counsel is more often able to devote time to legal strategy execution. These individuals often possess strong legal and business fluency, leadership capabilities and the ability to work dynamically in teams.
For our next post, we'll offer more examples of companies operating within each pathway.
Since reading Barbarians at the Gate in the early 1990s, I have been a huge fan of business histories. Although I have read scores (perhaps hundreds) of business histories, my list of "must reads" is still long. Recently, I decided to read one of the books on that list, The Soul of a New Machine, Tracy Kidder's account of Data General's efforts to build a minicomputer in the 1970s. This book was published in 1981, and it deals with events during my high school years, so it is a great trip down memory lane.
Here is an observation about the founders of Data General early in the book:
Some notion of how shrewd they could be is perhaps revealed in the fact that they never tried to hoard a majority of the stock, but used it instead as a tool for growth. Many young entrepreneurs, confusing ownership with control, can't bring themselves to do this.
Hmm. The distinction between ownership and control is a familiar one in corporate law circles, but this Berle-Means concept is typically applied to large corporations. What does it mean in the startup context?
Chuck O'Kelley examines the connection between entrepreneurship and the Berle-Means corporation in his 2006 article, The Entrepreneur and the Theory of the Modern Corporation, 31 J. Corp. L. 753, but I am curious about viewing this from the other direction. As noted by O'Kelley, the separation of ownership and control is used by Berle and Means to describe firms after the decline of the classical entrepeneur, so it seems somewhat surprising to see Kidder use those terms to describe a startup.
Founders often exert a tremendous influence on a company, even when shares are held by other employees and investors. This control may emanate from their formal positions within the company (CEO, CTO) or perhaps from the respect they are paid from other employees. But I think it is fair to say that ownership matters a great deal in the startup context because it is more concentrated than in the public company context. Thus, to a large extent, ownership is control in a startup.
Two recent developments in the law and practice of business include: (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups. My thesis here is that these two innovations will become disruptive legal technologies. In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.
A disruptive technology is one that changes the foundational context of business. Think of the internet and the rise of Amazon, Google, etc. Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM. Automobiles displace horses, and telephones make the telegraph obsolete. The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon: “creative destruction.”
Technologies can be further divided into two types: physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting). See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209). The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies. (Perhaps the biggest legal technological invention remains the corporation itself.)
1. Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough). A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making. In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress. Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives. In my theory of business, I label these kind of firms “hybrid social enterprises.” Business Persons, pp. 206-15.
A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea. Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone. (One of my first academic articles addressed the topic at an earlier stage. See “Beyond Shareholders: Interpreting Corporate Constituency Statutes.” I also gave a recent video interview on the topic here.) Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations. One recent count finds that twenty-seven states have now passed similar statutes. California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes. Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months. Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.
2. Crowdfunding firms. Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace. And the amounts of capital raised have sometimes been eye-popping. An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project. Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful. Kiva is probably the best known example. (Disclosure: my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)
However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms. Judging from some recent books at least, crowdfunding for new ventures seems to have arrived. See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding: The Next Big Thing (2013).
What if easier capital crowdfunding combined with benefit corporation structures? Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules? There are some reasons for doubt: securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly. But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich. Benefit corporations fueled by capital crowdfunding might lead a revolution: or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest. James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility: “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”
So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world. If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”
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Last week, Elon Musk—CEO of Tesla Motors—announced on the company’s blog “All Our Patent Are Belong To You” (apparently an homage to a late 90s, ungrammatical internet meme--thx Brian Gividen for pointing this out). Musk claims to adopt an “open source” policy for Tesla’s patents. He elaborates, “Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology.”
Musk’s move has been hailed widely in the blogosphere as an act of altruism (e.g., here & here). Most of this sentiment has been fairly unreflective. (However, for a certain-to-be prescient analysis that focuses more on the business implications of Musk’s move, see my colleague Orly Lobel’s comments over at Prawfsblawg and Harvard Business Review blog. While I’m quite sympathetic to most of Orly’s observations, as I explain below, I’m quite skeptical of her view that the move will be “good for faster industry innovation.”)
However, like most patent “give-aways,” legal loopholes usually spoil the party. Specifically, Musk stated that “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology” (emphasis added). Of course, “good faith” is a legal term of art large enough to drive a diesel-spewing, 18-wheeler through, much less a zero-emissions Tesla (and this loophole has been roundly noted by a few observant journalists).
Most importantly, is Musk (or his lawyers) expecting that others that use Tesla’s patented technology also make their patents available to Tesla? In more narrow terms, is the result similar to Twitter’s supposed “give-away” that reserved to Twitter the right to sue a competitor if the competitor sued Twitter? Probably so.
Thus, like Twitter, Tesla’s giveaway appears ultimately to boil down to a generalized offer to cross-license with competitors, including potential entrants. As such, Musk’s “give away” is not terribly radical, because cross-licensing in the high-tech and auto industries is fairly commonplace (veritable “keiretsus” in Scott Kieff’s words).
In this regard, as Michael Schallop, an IP attorney recognized, Tesla “wants to encourage others to develop on a common platform, and to the extent that they’re doing so, Tesla is not going to stop that by using its patents offensively.” Indeed, as I have described elsewhere, forcing smaller competitors and potential entrants to cross-license typically provides the incumbent (here, Tesla) a strong advantage, because the incumbent often controls “complementary assets” that provide competitive advantages aside from IP, like robust sales & marketing channels, access to capital, and the like. So, at worst blush, Tesla’s putative altruism could actually keep small, innovative entrants out of the commercial marketplace by effectively forcing them to license their patents to Tesla.
Furthermore, as others have noted, much of the Tesla patent portfolio does not seem particularly strong, nor does it appear to include much of its fundamental technology (which appears to be kept largely as trade secrets). Like IBM’s giveaways of several years ago, one wonders if Tesla found that giving away its patents would yield more revenue by seeding its technology widely—benefiting not only from potential infrastructure effects, but also from the consulting and joint venture dollars that go along with actually explaining to licensees how to implement the technology (specifically by using Tesla’s trade secrets and know-how, which Musk is not divulging). So perhaps Tesla is “patent washing” to offer the proverbial “Trojan horse” (sorry, last cliché) to the larger auto manufacturers (and even lure gullible “anti-patent” engineers to Tesla—see Orly Lobel’s points on these issues).
Or maybe Musk truly thinks he’s being altruistic. Unfortunately, contrary to Musk’s proclamation, “giving away” patents (even putting aside the “good faith” loophole) usually doesn’t mean “open source.” The reality is that Musk’s act is likely to redound much more to his self-interest than society’s.
If Musk were truly concerned about society being able to use Telsa’s technology, he’d specifically agree to the following terms: a royalty-free license to all Tesla current and future patents to any comer in writing with the single exception of maintaining an enforcement right against incumbents or large entrants (but not startups or small entrants) who sue Tesla for infringement. Additionally, Tesla would disclose all of its trade secrets under similar terms and use vigorous efforts codify Tesla’s know-how in so doing.
Of course, Tesla’s “give-away” is quite a ways from this much more thoroughly “open source” approach. As such, I’m not particularly optimistic that Tesla’s current policy will ultimately promote faster innovation or the more rapid adoption of electric vehicles. Perhaps even more unfortunate is the general inability of the press even to spot these issues, much less analyze their ramifications.
Uber just raised $1.2 billion at a valuation of $18 billion.
Let that sink in for a moment: a valuation of $18 billion! If that doesn't look like much, you must be thinking about Facebook's pre-IPO valuation of $50 billion, but Uber just landed the second largest private valuation on record. See here.
I have used Uber's service only once, with Vic Fleischer and Christine Hurt in Seattle, and I spent the whole ride quizzing the driver on the business model. Of course, I could have just googled it, but it was nice to see the business through the driver's eyes. It looks a lot like franchising, but with lower investment costs for the franchisees (drivers).
Why all the fuss? This is not just about replacing taxis. This is about displacing UPS and FedEx. See here for more on that possibility. Exciting stuff.
P.S. For those of you invested in the SharesPost 100 Fund, congratulations! Uber is on the list.
My law school classmate Henry Olsen has another great column in National Review, this time addressing the current political talk regarding the virtues of entrepreneurship is out of kilter Ronald Reagan's vision of entrepreneurship.
Reagan almost always referred to job creation as something we all did, not something that was the province of the elite few. His speeches did not emphasize, as Romney’s did or as Senator Ted Cruz’s still do, the role of the entrepreneur in creating jobs. He celebrated the effort, thrift, and ingenuity of the American worker, not the American boss.... For Reagan, the entrepreneur was simply another type of citizen, another average Joe. He or she is not greater than us, someone upon whom we depend. He IS us, and our efforts in working are as noble and important as his in creating.
Press business article of the week has to belong to Jessica Pressler, who writes great about everything. It's about the start-up culture, the place where tech and MBA meets, and guys who dislike cleaning their own clothes. A taste:
[W]hen people in a privileged society look deep within themselves to find what is missing, a streamlined clothes-cleaning experience comes up a lot. More often than not, the people who come up with ways of lessening this burden on mankind are dudes, or duos of dudes, who have only recently experienced the crushing realization that their laundry is now their own responsibility, forever. Paradoxically, many of these dudes start companies that make laundry the central focus of their lives.
I recently finished reading The Master Switch: The Rise and Fall of Information Empires by Tim Wu, a professor at Columbia Law School. The book was released in 2010, and I can't believe it has taken me this long to read it. (Concurring Opinions did a symposium on the book in 2011.) Once I started, I found excuses to peel away from other responsibilities so that I could read the book, and I finished it in three days. If you are interested in law and entrepreneurship, this book is essential reading.
Wu's proposed "Separations Principle" ("the creation of a salutary distance between each of the major functions or layers in the information economy") is nice example of a set of regulations designed to promote the "release of energy" that Darian Ibrahim and I discuss in Law and Entrepreneurial Opportunities. Wu argues that antitrust law alone cannot create an environment in which entrepreneurial action can flourish. He details the costs of monopoly with colorful stories, and shows how government sometimes enables entrepreneurship, but too often plays an abetting role in the supression of entrepreneurship. Of course, not everyone agrees with Wu on the effect of his policy prescription, but Wu has the frame exactly right.
By the way, on Saturday, Wu was the subject of a nice profile in the NYT, highlighting his role in the debates about net neutrality, a term he coined in 2003.
UPDATE: Speaking of net neutrality and entrepreneurship...
And this from today.
Before returning to the legal boundaries of monetary policy, I wanted to briefly highlight some interesting contract and regulatory issues lurking just beneath the surface of an unusual Kansas state court order declaring a sperm donor to be the legal father of a child, against the wishes of all persons involved.
In 2009, a Topeka man answered a Craigslist ad soliciting sperm donations. The ad was placed by a lesbian couple, Jennifer Schreiner and Angela Bauer. The man supplied a donation. Schreiner became pregnant and delivered a baby. Schreiner began receiving Kansas welfare benefits for the child. Seeking child support payments, the state sued the sperm donor to establish paternity. The state argued that the donor—who lacks any relationship with the child or the couple (now estranged) beyond supplying the donation—was the child’s legal father, and therefore must pay child support.
This is where the case gets interesting as a matter of private ordering and trade regulation.
Prior to the donation, all persons involved—the donor and both members of the couple—signed a non-paternity agreement in which the donor waived his parental rights and was released from his parental obligations.
Both mothers opposed the state’s campaign to declare the donor the child's legal father.
Nevertheless, the court granted the state’s paternity petition, which means it can now seek to compel the donor to provide child support. The paternity finding also appears to give the donor a good shot at asserting parental rights (though he seems unlikely to try).
Justifying its decision to ignore the wishes of both parents and the donor, the court intoned:
A parent may not terminate parental rights by contract, however, even when the parties have consented.
Well, maybe this case is a morality tale about those who would seek a father for their child on Craigslist. A warning from a heartland state to those who would selfishly try to contract around their sacred parental obligations. A sign that courts place the welfare of the child above all else. Right?
Haha, of course not!
Kansas law makes it easy to conclusively terminate the parental rights and obligations of sperm donors by contract. Care to guess what you need to do, besides sign a contract?
Pay a doctor.
The court explained:
Through K.S.A. 23-2208(f) [PDF], the Kansas legislature has afforded a woman a statutory vehicle for obtaining semen for [artificial insemination] in a manner that protects her and her child from a later claim of paternity by the donor. Similarly, the legislature has provided a man with a statutory vehicle for donating semen to a woman in a manner that precludes later liability for child support. The limitation on the application of these statutory vehicles, however, is that the semen must be “provided to a licensed physician." [FN1] (emphasis added)
The parties failed to do this.
So, the upshot is that you are free to find a father for your child on Craigslist—and you can even count on the State of Kansas to keep him out of your child’s life in the future—so long as you hire a doctor to do the procedure. Similarly, you can spend your free time fathering children on Craigslist without losing sleep over child support suits—as long as you kick some of the action upstairs to an M.D.
It’s not just Kansas; California, Illinois, and as many as 10 other states [FN2] follow the same law, the Uniform Parentage Act of 1973.
I’m not a family law expert, but it seems to me that a complete list of legitimate and unique public policy concerns that are implicated when a couple and a third-party sperm donor settle their parental obligations by contract looks something like this:
- Ensuring that the state can identify who can be held legally responsible for supporting the child.
Nevertheless, let’s assume there are also truly compelling public health reasons to involve a physician in artificial insemination. After speaking with a few doctors, I’m skeptical that this is the case, but even if it were here are ten points that I think are worth considering:
- Should a mother who became pregnant by artificial insemination be forced to share parental rights with a stranger who donated sperm simply because she decided not to hire a doctor for the procedure?
- Conversely, should the scope of a sperm donor’s rights and responsibilities as a father turn on the decision whether to enlist a doctor to oversee the procedure?
- Should the adequacy of a child support scheme turn on whether couples using sperm donors choose to hire a doctor?
- There are sound public policy reasons to be concerned about voluntariness in agreements that waive paternity. But if this case is really about ensuring voluntariness, why is enlisting doctors the solution? Establishing consent during contract formation is not some novel problem. Hiring a doctor is a novel solution, but as an evidentiary device it is not very probative.
- Hiring doctors for artificial insemination is not cheap. A single attempt through a physician’s office costs about $3,000, and sometimes multiple attempts are necessary. Unsurprisingly, the American Fertility Association (a trade group for the fertility industry) applauded the court’s decision.
- This rule looks even more like an attempt to extract rents when you consider that for many people, the price of artificial insemination without physician assistance may be zero.
- If the state interest in the use of doctor-assisted artificial insemination is so compelling, maybe the law should simply require it on penalty of criminal sanction. I have never even heard this idea floated, probably because it would be perceived (rightly) as an excessive intrusion on various important freedoms…
- …yet while they do not provide criminal sanctions, about 13 states are willing to provide unbelievably harsh "family-law sanctions." If a woman declines to hire a doctor, she is placing herself and her child in eternal jeopardy; at any time, the donor or the state can move to declare the donor to be the legal father, which would put the donor in a position to seek full parental rights—even if he is a stranger. (The same is true in reverse re: child support.) It is unsurprising that both mothers opposed the state’s petition.
- Although facially neutral, this rule is almost certainly discriminatory in practice. It means that lesbian couples must either hire a doctor or adopt—there is no other way they can safely preclude the donor from being granted parental rights. And of course this is just one of many unofficial taxes gays and lesbians must pay, especially in states like Kansas that do not allow them to marry. It seems to me that there’s a good argument the law should fail rational basis or equal protection review, but I will leave that brief to the con law scholars.
- Finally, beyond any constitutional infirmity, this law should serve as a reminder that protectionist regulations—which often take the form of onerous occupational licensing restrictions and NIMBY zoning rules—frequently have regressive distributional consequences, because they tend to favor powerful incumbents. And although probably not the case here, such laws can harm the broader economy as well by stifling innovation.
I welcome your comments. And I hope my doctor friends still talk to me.
* * * *
[FN1] It should be noted that under the letter of the statute as well as a 2007 Kansas Supreme Court decision (PDF) on this issue, the court did not have an obvious alternative to finding for the state. The problem, such as there is one, is with the statute.
[FN2] An accurate count is not possible without doing a full 50-state survey. As I have written about previously, the Uniform Law Commission’s Enactment Status Maps are often unreliable or imprecise (see FNs 163 & 188).
The Bitcoin exchange Mt. Gox appeared to be undergoing more convulsions Tuesday [February 25], as its website became unavailable and trading there appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency. . . .
Investors have been unable to withdraw funds from Mt. Gox since the beginning of this month. The exchange has said that a flaw in the bitcoin software allowed transaction records to be altered, potentially making possible fraudulent withdrawals. No allegations have been made of wrongdoing by the exchange, but the potential for theft has raised concern that the exchange wouldn't be able to meet its obligations.
The apparent collapse of Mt. Gox is just the latest shock to hit Bitcoin, the price of which is now off more than 50% from its December 2013 peak:
For those better acquainted with the dead-tree/dead-president variety of money, Bitcoin is a virtual currency not backed by any government. Rather than being printed or minted by a central bank, Bitcoins are created by a computer algorithm in a process known as "mining" and are stored online or on your computer. They are bought and sold on various exchanges, including until recently Mt. Gox (whose troubles have been reported for a few weeks now).
There are many reasons, some of them even lawful. Bitcoins can be regarded as a medium of exchange, an investment, a political statement...or a way of avoiding capital controls and other pesky laws like bans on drug trafficking and human smuggling.
But the criminal potential of Bitcoin is probably overstated. The Chinese have gotten wise to its use for avoiding capital controls. Using Bitcoin for criminal or fraudulent activity would be difficult at scale (PDF). The Walter White method is still far and away the best way to ensure your criminal proceeds retain their value and anonymity.
I don't share the utopian fervor for Bitcoin expressed in tech and libertarian circles (see, e.g., this supposedly non-utopian cri de coeur), but it may have some positive potential as a decentralized and lower-cost electronic payments system. We'll see if that ever gets off the ground.
In the meantime, the Mt. Gox collapse is pretty huge news for Bitcoinland. Unlike the NYSE (the failure of which would be hard even to imagine), Mt. Gox does not benefit from any systemic significance and thus is unlikely to receive a lot of official-sector help. The situation has some early adopters running for the Bitcoin exits, like this leading Bitcoin evangelist.
Despite (because of?) my agnosticism on the currency, I'll be writing more about Bitcoin soon. (Mainly, I wanted to stake a claim to being the first to write about Bitcoin on The Conglomerate.) If your Palo Alto cocktail party can't wait, however, this explainer (PDF) from the ever-impressive Chicago Fed should tide you over.
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Last week, some number of Americans tuned in to President Obama's State of the Union Address (or caught the highlights on radio/web). Governors had their own "State of the State Addresses," like Gov. Pat Quinn here in Illinois. Among other proposals that he mentioned, one jumped out: the $39 limited liability company.
Illinois wants more businesses headquartered here. (Illinois almost lost ADM, lost part of Jimmy John's operations, and lost Office Depot. Illinois state corporate taxes are often cited as the culprit. Illinois also wants to start more small businesses. Illinois also has the highest limited liability organization fee in the country: $500.
So, Gov. Quinn announced that he wants to lower that fee to the lowest in the country, $39, to spur small business growth.
So, there's a lot of faulty reasoning here. I have no problem with lowering the LLC fee, but Gov. Quinn shouldn't be surprised if it has no effect on job growth in Illinois.
First, as anyone reading this blog knows, organizing in a state does not mean that you will move your operations there. (See, e.g., Delaware.) Now, it could bring indirect benefits to the state, like franchise taxes and litigation expenditures, but unless Illinois becomes the Delaware of LLC law, it won't bring any jobs (and then not that many). Second, it's hard to imagine a would-be entrepreneur thinking "Gee, I really want to start a business, but the LLC fee is $461 too high." Any small business owner in Illinois could organize an LLC anywhere (Delaware -- $90!; Indiana -- $90!). Third, the ongoing costs of incorporation (annual fees, taxes) may be more inportant than the organization fee for attracting incorporations, even if we thought out-of-state incorporations would be a boon to Illinois.
I spend a lot of time talking to people who study entrepreneurship, and many of them are enthusiasts. Of course, many of use are Walter Mittys, living our lives vicariously through the daring business people we study, so it's easy to proclaim, entrepreneurship is for everyone. Then I stumbled on this infographic that made me think that might actually be true ...
'Opportunity' is a central concept in entrepreneurship research, and this Article explores the relationship between law and entrepreneurial opportunities. We adopt the widely held view that entrepreneurial opportunities are ideas created by entrepreneurs, rather than resources waiting to be discovered. Of course, as with all products of the imagination, entrepreneurial opportunities draw on existing resources for inspiration, and we contend that some legal systems are better than other legal systems at encouraging entrepreneurs to think about existing resources in new ways. We also contend that when entrepreneurial opportunities are exploited, the inventory of resources expands, thus laying the foundation for the creation of more entrepreneurial opportunities. This 'opportunity cycle' leads to plentiful and continuous opportunity creation.
Legal rules play an important role in each stage in the opportunity cycle, and two sets of stories told about law are foundational to innovation research. The first is that property rights (i.e., rights to exclude) are essential in the development of innovative resources because property rights assure market participants that they can retain many of the benefits of their success. The second is that various sets of legal rules – including laws limiting barriers to entry, bankruptcy laws, and corporate laws relating to limited liability and asset partitioning – reduce the costs of entrepreneurial action and failure, thus emboldening entrepreneurs to exploit opportunities. Our thesis is that all of these stories are part of a grander tale about the opportunity cycle, and the central theme of that tale is that the promotion of entrepreneurial action is a fundamental value of the U.S. legal system, the expression of which through positive law inspires entrepreneurs to create more opportunities.