The Essential Role of Organizational Law

Henry Hansmann and Ranier Kraakman

Berkeley Olin Program in Law & Economics, Working Paper Series from Berkeley Olin Program in Law & Economics

Abstract: The Role and Structure of Organizational Law In every society, the law establishes a set of standard legal entities. In the United States, these entities include 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. In important respects, the number and nature of these entities is often strikingly similar from one jurisdiction to another, but at the same time, there are conspicuous variations, even among jurisdictions with similar economies. In this essay, we focus on two questions: What are the common features shared by legal entities, and to what extent do these features require specialized legal rules? Our thesis is that the essential feature of organizational law is asset partitioning -- that is, the provision of a mechanism by which creditors of the firm obtain a priority claim in the firm's assets over individual creditors of the firm's managers or HBIs. The idea that partitioning a fixed pool of assets can reduce overall costs of credit by reducing monitoring costs is already familiar. In large part, however, the existing literature focuses on devices for asset partitioning other than organizational law (for example, security interests). Our contribution here is to demonstrate the close relationship between asset partitioning and organizational law.

Date: 1999-04-29
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