Why Don't Entrepreneurs Use Uncorporations

In his excellent book, The Rise of the Uncorporation, Larry Ribstein points out that venture capital firms typically use limited partnerships to raise funds that are then invested in a portfolio of start-ups and early stage firms (226). In contrast, the VC's portfolio firms "typically are organized as corporations" (227). Ribstein argues that an uncorporation form (LLC) would be preferable in several respects and ascribes the continued use of the corporate form in this context "at least partly" to tax considerations (228).

A new paper by Florida State economists David Cooper and Krista Jabs Siral suggests an alternative behavioral explanation:

Entrepreneurs are surprisingly unlikely to have partners. In spite of the obvious advantages to forming partnerships, only a small minority of entrepreneurs (less than 10%, excluding family businesses) have partners. A number of possible explanations exist for this puzzling phenomenon, including an inability to locate suitable partners, fear of moral hazard, and a preference for not working in groups. Utilizing a diverse subject population with a high proportion of active entrepreneurs, we use a team production experiment to study whether entrepreneurs prefer to work alone or in a team. The data indicate that entrepreneurs, while no less likely to be good teammates, are substantially less interested in joining teams. This suggests that efforts to encourage partnership among entrepreneurs may run contrary to the preferences of this group.

If entrepreneurs in fact are "more motivated by a preference for autonomy than a desire for wealth" when choosing an initial organizational form, that preference may carry over into the VC stage of the start-up firm's evolution.

This insight may help explain some additional features of the VC portfolio firm. For example, VCs often invest in their portfolio firms via debt or convertible preferred stock. This may allow the team-averse entrepreneur who holds common stock to maintain the illusion, if not the reality, of autonomy.

It also suggests a potential area of research into the role of the board of directors of a VC portfolio firm. Does the fact that the VC typically is actively engaged via board membership rather than as officers assist the entrepreneur in maintaining the psychically valuable feeling of autonomy?

Larry responds here. I take Larry's point that the study focuses on "economic concept of teams rather than, like my book, choice of organizational form." But I still think the study fairly raises the question of whether the corporate form does a better job of preserving what I called above the illusion of autonomy. What is needed, I suppose, is a study of how entrepreneurs perceive corporations versus uncorporations.