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The Essential Role of Organizational Law

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  • Henry Hansmann
  • Reinier Kraakman
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    Abstract

    In every developed market economy, the law provides for a set of standard form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this essay we ask whether organizational law serves, in addition, some more essential role, permitting the creation of relationships that could not practicably be formed just by contract. The answer we offer is that organizational law goes beyond contract law in one critical respect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries ? a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: it involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bondi

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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm147.

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    Date of creation: 01 Jun 2000
    Date of revision: 01 Nov 2001
    Handle: RePEc:ysm:somwrk:ysm147

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    Cited by:
    1. Naomi R. Lamoreaux & Jean-Laurent Rosenthal, 2006. "Contractual Tradeoffs and SMEs Choice of Organizational Form, A View from U.S. and French History, 1830-2000," NBER Working Papers 12455, National Bureau of Economic Research, Inc.
    2. Stefano Lombardo & Nils Wunderlich, . "Über den ökonomischen Sinn und Unsinn eines Haftungsdurchgriffs im Recht der Kapitalgesellschaften," German Working Papers in Law and Economics 2004-1-1107, Berkeley Electronic Press.
    3. Benito Arruñada, 2009. "The law of impersonal transactions," Economics Working Papers 1187, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2010.
    4. Benito Arruñada, 2010. "Institutional support of the firm: A theory of business registries," Economics Working Papers 1195, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2010.
    5. Gillian Hadfield, . "Contract Law is Not Enough: The Many Legal Institutions That Support Contractual Commitments," University of Southern California Legal Working Paper Series usclwps-1003, University of Southern California Law School.
    6. John Armour & Michael J Whincop, 2005. "The Proprietary Foundations of Corporate Law," ESRC Centre for Business Research - Working Papers wp299, ESRC Centre for Business Research.
    7. Virgile Chassagnon, 2008. "Qu'est-ce qu'une firme (-réseau) ?," Post-Print halshs-00374758, HAL.

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