The essential role of organizational law

In every developed market economy, the law provides for a set of standard-f orm legal entities. In the United Stares, these entities include, among oth ers, the business corporation, the cooperative corporation, the nonprofit c orporation, the municipal corporation, the limited liability company, the g eneral partnership, the limited partnership, the private trust the charitab le trust, and marriage. To an important degree, these legal entities are si mply standard-form contracts that provide convenient default terms for cont ractual relationships among the owners, managers, and creditors who partici pate in an enterprise. In this Article, we ask whether organizational law s erves, in addition, some more essential role. The answer we offer is that organizational law goes beyond contract law in one critical aspect, permitting the creation of patterns of creditors' righ ts that otherwise could not practicably be established. In parr, these patt erns 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 seco ndary importance. The truly essential function of organizational law is, ra ther "affirmative asset partitioning. " In effect this is the reverse of li mited liability: it involves shielding the assets of the entity from the cr editors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of signal importance in constructing the large scale organizations that characterize modern eco nomies. Surprisingly, this crucial function of organizational law-which is essentially a property-law-type function-has largely escaped notice, much l ess analysis, in both the legal and the economics literature.