Limited Liability Unlimited

Abstract:     
Many types of economic relationships, including joint ventures, franchises and joint operating agreements, resemble economic firms but differ from them in critical respects. Because of these non-firm attributes, the parties to these relationships may not want the owner vicarious liability that comes by default with the legal characterization of a relationship as a partnership or agency. In order to clarify that the relationship does not trigger vicarious liability, the parties can form a corporation or other limited liability business association. However, the statutory default rules of these business associations do not fit many borderline firms. This Article proposes a way out of this dilemma -- statutes authorizing "Contractual Entities" whose owner liability and other terms would be governed solely by their filed operating agreements. The Article analyzes potential arguments against the proposal, including those relating to the appropriate scope of limited liability and the functions of statutory forms. It also discusses the political aspects of adopting Contractual Entity statutes and some implications of the proposal for the future of limited liability and of contractual choice of law.

Number of Pages in PDF File: 41

JEL Classification: G00

working papers series