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Friday, September 23, 2016

Nudging Entrepreneurs into Noncompliance: Why does Nevada have so many Benefit Corporations?

By Eric Franklin[1]

For most new businesses, Delaware is the default state of incorporation. Many states have tried to unseat Delaware as the preferred destination for business formation, offering low (or no) corporate taxes, administrative ease in fulfilling corporate formalities, or favorable business laws. Nevada is one of these states, openly marketing itself as the Delaware of the West.[2] However, despite its best efforts, Nevada still lags behind Delaware on business formations. In 2014, for example, Nevada had 57,644 new entity filings,[3] which is just slightly more than one quarter of Delaware’s 168,966 new entity filings for the same period.[4]

Given these data, it appears that Nevada’s bid to become the leader in business formations has failed. However, there is one area where Nevada has bested Delaware: formation of benefit corporations.[5] In 2014, there were 158 benefit corporations formed in Delaware,[6] while Nevada had 697 benefit corporations formed in the same period.[7]

Thus, despite the fact that there were about three times as many businesses formed in Delaware than in Nevada in 2014, Nevada had more than four times the number of benefit corporation formations. What accounts for this discrepancy? Are Nevada entrepreneurs particularly socially conscious? Does Nevada law provide more protection for businesses that look beyond the bottom line? Has the Delaware of the West moniker begun to take hold among the entrepreneurs interested in corporate social responsibility?

It turns out that the answer is much more mundane. The startling number of benefit corporations formed in Nevada is due to the Nevada Secretary of State’s website design.[8] As this blog post will show, the architecture of the website inadvertently encourages the formation of benefit corporations.

To form a corporation in Nevada, an entrepreneur uses SilverFlume,[9] a user-friendly Secretary of State website that walks the entrepreneur through an online formation process in a matter of minutes. After logging in and choosing “Form a corporation,” an entrepreneur is faced with the following webpage:

Note that on the very first page, the website asks if the entity is a “Benefit Corporation.” This is the first required question after the corporation’s name and suffix. If the entrepreneur clicks on the question mark beside the prompt, a pop-up window provides the following information:

If the entrepreneur selects “Yes,” he or she is asked to “Explain the purpose of the corporation.” An entrepreneur might put anything in this section, and there is no mechanism to ensure that the purpose is socially beneficial. An entrepreneur might simply enter “run a mechanic shop” or “sell coffee.” The website makes no distinction between a socially beneficial purpose and a traditional for-profit purpose, and there is therefore no notice to the entrepreneur that a benefit corporation is supposed to create “a material positive impact on society and the environment.”[10] After this page, the website ushers the entrepreneur through the balance of the formation process, and the benefit corporation question is never again broached.

By presenting the choice in this manner, the Nevada Secretary of State has inadvertently encouraged the formation of benefit corporations. Neither the prompt nor the pop-up window adequately inform the entrepreneur of what, precisely, a benefit corporation is. All the entrepreneur sees is the following question: “Is this entity a ‘Benefit Corporation'?” Without adequate legal counsel, there is no reason for an entrepreneur to recognize the consequences of this decision.

It is therefore not surprising that Nevada can boast the formation of so many benefit corporations. It is likely that the entrepreneurs have no idea what they are choosing. They are presented with the option of either being or not being a “benefit” corporation. Is it any wonder that many entrepreneurs have unwittingly chosen yes? Who wouldn’t want to be a benefit corporation, even if they don’t know what it means?

One might reasonably ask how we can be sure these decisions were mistakes. Although it is unlikely, certainly there is some chance that Nevada has a peculiarly socially conscious entrepreneurial community. However, preliminary research reveals that the vast majority of benefit corporations were probably formed unintentionally. For example, of the 697 benefit corporations formed in Nevada in 2014, only one entity has posted the required annual benefit report on its website.[11]

Delaware takes a very different approach. Benefit corporations are presented as an entity option in the same list as traditional corporations, nonprofit corporations, LLCs, and partnerships. Each entity requires a completely separate set of forms. Thus, an entrepreneur forming an entity in Delaware must make a separate decision to form a benefit corporation. The entrepreneur is not, as in Nevada, asked in an offhand manner if the corporation being formed is a benefit corporation. In Delaware, an entrepreneur is apprised of the fact that the benefit corporation is a separate entity, with consequences and responsibilities that may be different from traditional corporations.

The Nevada Secretary of State website is performing a disservice to entrepreneurs. By inadvertently persuading entrepreneurs to form benefit corporations, the Secretary of State is setting the entities up for failure. Without proper notice of the expectations attendant to being a benefit corporation, such entrepreneurs will undoubtedly fail to fulfill their statutory responsibilities.

[1] Associate Professor of Law and Director of the Small Business and Nonprofit Legal Clinic, William S. Boyd School of Law, University of Nevada, Las Vegas. The author would like to thank Andrew Martineau and Christopher Kelly for their research assistance and Adam Ellis and Emily Haws for their helpful comments.
[2] “Nevada has, perhaps, been the most aggressive challenger of Delaware, loosening its laws to protect managers (directors and officers) even more than Delaware and advertising the benefits of Nevada corporate law heavily.”
[3] See Nevada Secretary of State 2013-2014 Biennial Report, available at http://nvsos.gov/sos/home/showdocument?id=3485.
[4] See Delaware Division of Corporations 2014 Annual Report, available at http://corp.delaware.gov/Corporations_2014%20Annual%20Report.pdf (Delaware Annual Report). These numbers are even starker when one considers that Nevada has a population of roughly three times that of Delaware (2,890,848 and 945,934, respectively, according to 2015 U.S. Census estimates).
[5] A benefit corporation is a relatively new for-profit entity form that explicitly permits the organization to use corporate assets in a socially beneficial manner.
[6] See Delaware Annual Report.
[7] Data received from Nevada Secretary of State, on file with the author.
[8] J. Haskell Murray, The Social Enterprise Law Market, 75 Maryland L. Rev. 541, 581 (2016) (“Nevada is in the lead [for benefit corporations] currently, but may have been boosted by the inclusion of a benefit corporation check box on the state form, which incorporators may or may not have fully understood.”).
[9] SilverFlume: Nevada’s Business Portal, https://www.nvsilverflume.gov/home.
[10] NRS 78B.040
[11] According to NRS 78B.170, a benefit corporation must post its annual benefit reports on the entity’s website. The results of this research are on file with the author and will be presented in a future article.

Tuesday, August 2, 2016

Professor Marketa Trimble Writes Chapter on Geoblocking

Marketa Trimble is the Samuel Lionel Intellectual Property Professor of Law at the William S. Boyd School of Law.

In the recently published online volume, Building a European Digital Space,  Professor Trimble contributed a chapter titled "The Role of Geoblocking in the Internet Legal Landscape."

The volume was a supplement to the 12th International Conference on Internet, Law & Politics, which took place July 7-8 in Barcelona.

In her research, Professor Trimble focuses on intellectual property and issues at the intersection of intellectual property and private international law/conflict of laws.

Monday, April 11, 2016

Boyd Senior Fellow Dr. Nancy E. Brune Named to a Key Obama Administration Post

In an announcement released by The White House on April 8, President Obama announced his intention to appoint
Dr. Nancy E. Brune, Senior Fellow at the UNLV William S. Boyd School of Law and Executive Director of the Guinn Center for Policy Priorities, Nevada, to the President’s Advisory Commission on Educational Excellence for Hispanics.

Dr. Brune is one of four individuals named by the President to a key administration post. In the announcement, President Obama said, “I am honored that these talented individuals have decided to serve our country. They bring their years of experience and expertise to this Administration, and I look forward to working with them.”

In her role at the Boyd School of Law, Dr. Brune is focused on global policy in the areas of security, natural resources, energy, and trade.

Vincent Kwan, First-Year Law Student, Elected to Director of the Rebel Venture Fund

Congratulations to first-year law student Vincent Kwan who, after having joined his first semester of law school, was recently elected to director of the Rebel Venture Fund (RVF).

The RVF is UNLV’s venture capital (VC) fund that looks to make equity investments in private high-growth companies throughout Las Vegas and Southern Nevada. The fund invests in startups at every stage and provides knowledge, resources, and support to the growing tech and small business community here in Las Vegas. Unlike other university VC funds, the RVF is entirely student lead and run. Students work closely with entrepreneurs and leaders in the business community to conduct screenings, due diligence, investments, negotiations, and close deals.

Founded in 2013, RVF draws its membership from graduate and undergraduate students who work closely with a board of seasoned angel investors and venture capitalists in the community to arrive at investment decisions. In addition to having strong ties and relationships with business leaders, investors, and professionals in the community, RVF is supported by the UNLV Center for Entrepreneurship.

Born and raised in Las Vegas, Kwan decided to escape the hot desert and go as far away as possible to the cold East Coast. He went to New York City where he attended NYU Stern School of Business for his undergraduate, pursuing a degree in international business and political economy. Having worked in management consulting, corporate business strategy, and tech startups, Kwan has a broad range of experience and knowledge in the business world. Now hoping to supplement and further enhance his business knowledge, he in back home in Las Vegas attending the Boyd School of Law where he is currently in his first year as a full-time student.

With a strong passion for the Las Vegas tech and small business community, Kwan plans to make RVF a top VC fund and UNLV one of the best resources for the talented entrepreneurs and businesses in Las Vegas. The city has undergone a lot of change in recent years, especially with the Downtown Project, Work In Progress, the Innevation Center, and more to attract talented techs and entrepreneurs. He hopes to connect this community, help it flourish, and bring new young talent to Las Vegas.

Friday, February 19, 2016

Feb. 18 Boyd Briefs Now Available

The Feb. 18 issue of Boyd Briefs is now available.

This week's edition features Professor Addie Rolnick, student Tyler Mowbray, and alumna Audrey Beeson '07.

Professor Rolnick engages in scholarly work and advocacy within three main areas: criminal and juvenile justice in Indian country, race and criminal justice, and Indians and race. Before joining Boyd, she represented tribal governments; she continues to advocate for indigenous people as well as other groups and individuals who are poorly served by the justice system.

Mowbray is interested in mediation and litigation as a future career. Growing up in a Nevada legal family, he observed the positive impact lawyers have on their clients, and the positive impact of third-party neutrals who resolve many conflicts before they wind up in litigation.

Beeson is of counsel with The Law Offices of Frank J. Toti Esquire; and owns her own business, Audrey Beeson, Esq. PLLC. Her practice focuses primarily on family law and she is a Nevada Board Certified Family Law Specialist. She also does some estate planning -- drafting simple wills, POA's and trusts.

To subscribe to Boyd Briefs, visit law.unlv.edu/BoydBriefs.

Friday, February 12, 2016

Feb. 11 Boyd Briefs Now Available

The Feb. 11 issue of Boyd Briefs is now available.

This week's edition features Professor Francine Lipman, student Marta Kurshumova, and alumna Holly Walker '14.

Professor Lipman, Boyd Professor of Law, is an elected member of the American Law Institute, the American College of Tax Counsel, and the American Bar Foundation as well as the author of numerous articles on tax and accounting issues. In both her teaching and scholarship, she draws on an exceptional record of experience as an accountant and lawyer.

After leaving Bulgaria and her family at the age of 19, Kurshumova attended Wesleyan College in Macon, Ga. before coming to Boyd, "one of the proudest moments" of her life.

Walker is a judicial law clerk to Justice Michael L. Douglas at the Supreme Court of Nevada. Born and raised in Las Vegas, she has always been dedicated to pursuing her education here and says that Boyd faculty and staff have always been supportive.

To subscribe to Boyd Briefs, visit law.unlv.edu/BoydBriefs.