Form and Function in Business Organizations

Abstract

In this piece, I argue that the recent proliferation of forms of business organizations in addition to the traditional partnership and corporation may have arisen from the implicit recognition that various organizations may serve needs of business people in different types of businesses, and that traditional theory of the firm explanations are too narrowly focused on market failure explanations for firm formation. I identify at least five different factors that may motivate people to form a business organization and discuss how these different factors may militate in favor of one business form rather than another. I conclude that the collections of rules that have evolved to govern different business organizations may be internally coordinated with each other in subtle ways that matter given the distinct uses to which each form has traditionally been put. Further, I argue that it is important to maintain standard form firms even though the parties may be almost totally free to contract around the standard terms, because default rules matter most when in disputes for which the parties have not planned, and because standard form firms may assist the parties in reaching agreement in a multilateral negotiation.

Keywords: business organizations, partnership, corporation

JEL Classification: K0, K2, K22, L20, L21, L22, M14