Skeleton Key Business Entities
71 Pages Posted: 20 Feb 2019 Last revised: 3 Aug 2021
Date Written: January 31, 2019
This article identifies the increasingly important phenomenon of what I term “skeleton key business entities” and discusses the ramifications of their rise. I show that modern business entities, such as LLCs, are increasingly created and deployed to accomplish customized commercial transactions and evade legal restrictions that would otherwise prevent those transactions. Rather than acting as traditional businesses, such entities are tools, or “skeleton keys,” used to open “locked doors” presented by existing bodies of law, including contract, property, bankruptcy, copyright, and tax.
The article centers on the example of the “Artist’s Contract,” a fascinating 1971 project, in which artists sought to retain rights in artworks they sold—to obtain a percentage of future appreciation in value, to exhibit the work upon request, and so on. As prior scholarship has noted, the transaction contemplated by the Artist’s Contract could not have been accomplished in regular contract form due to rules concerning privity, servitudes on chattels, and the first sale doctrine, among other things. But this no longer remains true. The emergence of modern business entity law provides the tools—i.e., skeleton key business entities—to “solve” all of these legal problems and allow for bespoke transactions such as those desired by the artists.
The LLC operating agreement now operates, essentially, as “super-contracts” capable of evading legal limitations at low cost to some market participants—but perhaps higher cost to society. After explaining this phenomenon and giving a range of examples of where it has arisen, I suggest that scholars both within and outside the business and commercial law realm should turn renewed attention to whether and how the remarkable capacities of these transactional tools should be further facilitated—or reined in. We should consider if it makes sense to force parties pursuing newly enabled forms of commerce to bear the costs of filtering transactions through business entities; or alternatively, which traditional doctrines should bind modern entities as they bind parties outside of those forms
NOTE: This working paper draft dated as of January 31, 2019. Some of this material was subsequently published as Artworks as Business Entities: Sculpting Property Rights by Private Agreement, 94 TULANE L. REV. 247 (2020).
Keywords: Business Law, Commercial Law, Contract Law, Property Law, Art Law, Intellectual Property, Copyright, Secured Transactions, Bankruptcy
JEL Classification: K11, K12, K22
Suggested Citation: Suggested Citation