Working Paper: NBER ID: w13109
Authors: Timothy Guinnane; Ron Harris; Naomi R. Lamoreaux; Jean-Laurent Rosenthal
Abstract: This article challenges the idea that the corporation is a globally superior form of business organization and that the Anglo-American common-law is more conducive to economic development than the code-based legal systems characteristic of continental Europe. Although the corporation had important advantages over the main alternative form of organization (partnerships), it also had disadvantages that limited its appeal to small- and medium-sized enterprises (SMEs). As a result, when businesses were provided with an intermediate choice, the private limited liability company (PLLC) that combined the advantages of legal personhood and joint stock with a flexible internal organizational structure, most chose not to organize as corporations. This article tracks the changes that occurred in the menu of business organizational forms in two common-law countries (the UK and the US) and two countries governed by legal codes (France and Germany) and presents data showing the rapidity with which firms in each country responded to enabling legislation for PLLCs. We show that the PLLC was introduced first and most easily in a code country (Germany) and last and with the most difficulty in a common-law country (the US). Late introduction was associated with prolonged use of the partnership form, suggesting that the disadvantages of corporations did indeed weigh heavily on SMEs.
Keywords: corporation; business organization; limited liability; small and medium-sized enterprises
JEL Codes: K20; K22; N40; N80; O57
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of the PLLC (Y20) | decline in the popularity of the corporate form for SMEs (L25) |
| introduction of the PLLC in Germany (K29) | decline in the popularity of the corporate form for SMEs (L25) |
| delayed introduction of the PLLC in the U.S. (N22) | prolonged reliance on partnerships (L14) |
| corporate structures (L22) | disadvantages for SMEs (L25) |
| PLLC (K29) | mitigates risks associated with corporate governance for minority shareholders (G34) |