The New Business Entities in Evolutionary Perspective

10 Pages Posted: 16 Feb 2005

See all articles by Henry Hansmann

Henry Hansmann

Yale University - Law School; European Corporate Governance Institute (ECGI)

Reinier Kraakman

Harvard Law School; European Corporate Governance Institute

Richard Squire

Fordham University School of Law; European Corporate Governance Institute (ECGI)

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Date Written: February 2005

Abstract

The many legal forms for business organizations that first appeared in the U.S. during the last thirty years - the Limited Liability Company (LLC), the Limited Liability Partnership (LLP), the Limited Liability Limited Partnership (LLLP), and the statutory Business Trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business corporation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights, and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of a continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction.

The essay first develops this argument in terms of the tradeoff between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention - that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

Keywords: Corporations, Partnerships, Organizations, History, Limited Liability Companies, Legal Entitites, Asset Partitioning

JEL Classification: D23, G32, K22, N80

Suggested Citation

Hansmann, Henry and Kraakman, Reinier H. and Squire, Richard C., The New Business Entities in Evolutionary Perspective (February 2005). Available at SSRN: https://ssrn.com/abstract=667929 or http://dx.doi.org/10.2139/ssrn.667929

Henry Hansmann (Contact Author)

Yale University - Law School ( email )

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European Corporate Governance Institute (ECGI)

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Reinier H. Kraakman

Harvard Law School ( email )

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European Corporate Governance Institute ( email )

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Belgium

Richard C. Squire

Fordham University School of Law ( email )

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New York, NY 10023
United States
212-964-1584 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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