Location of Repository

Contractual Tradeoffs and SMEs Choice of Organizational Form, A View from U.S. and French History, 1830-2000

By Naomi R. Lamoreaux and Jean-Laurent Rosenthal

Abstract

Today the vast majority of multi-owner firms in the United States are corporations, but that was not the case in the past. Before the advent of the income tax, tort litigation, and significant federal regulation, entrepreneurs more often than not chose to organize as partnerships, a form that economists consider seriously flawed. Why would they make such a terrible mistake? We begin by noting that corporations created new types of contracting problems for businesses at the same time as they solved problems afflicting partnerships. We then model the tradeoffs involved in the choice of corporations versus partnerships and confirm that the model’s assumptions are consistent with U.S. legal rules up through the 1940s. The model implies that partnerships and corporations are complementary organizational forms, and we show that data from the U.S. Census of Manufactures strongly supports that implication. We also verify that the model’s assumptions hold for the broader set of organizational choices available under the French Code de Commerce and use data on multi-owner firms registered in Paris in the 1830s and 1840s to demonstrate the complementary character of the basic forms. Despite much literature emphasizing the fundamentally different environments for business associated with the French and U.S. legal regimes, the basic calculus underpinning the choice of organizational form was the same in both countries.

OAI identifier:

Suggested articles

Preview

Citations

  1. (1999). Empire Express: Building the First Transcontinental Railroad.
  2. (1997). A History of Corporate Finance. New York:
  3. (1999). Federalism and Corporate Law: The Race to Protect Managers from Takeovers.” Columbia Law Review,
  4. (2003). Locking in Capital: What Corporate Law Achieved for Business Organizers in
  5. (1998). Corporate Finance, the Theory of the Firm and Organizations.”
  6. (1996). Federal Taxation in America: A Short History. New York:
  7. (2003). A Theory of Joint Asset Ownership.”
  8. (1953). How Illinois Corporations May Enjoy Partnership Advantages: Planning for the Closely Held Firm.”
  9. Compte général de l’administration de la Justice Civile et Commerciale. Paris: imprimerie nationale,
  10. (1999). Les sociétés commerciales : cours de droit commercial.
  11. (1972). Wealth Distribution and Ownership Rights.”
  12. (2004). From Citizens to Plutocrats: Nineteenth-Century Shareholder Voting Rights
  13. (1986). Limited Liability and the Development of the Business
  14. (1991). The Legal Nature of Corporation,” Ph.D. dissertation,
  15. tribunaux: Journal de jurisprudence et des débats judiciares.
  16. (2004). Legal Entities, Asset Partitioning, and the Evolution of Organizations.
  17. (1995). Firms, Contracts, and Financial Structure.
  18. (1934). The Limited Partnership in New Jersey.”
  19. (1964). Law and Economic Growth: The Legal History of the Lumber Industry in Wisconsin,
  20. (2005). Legal Regime and Contractual Flexibility: A Comparison of Business’s Organizational Choices
  21. Legal Determinants of External Finance.”
  22. (1998). Law and Finance.”
  23. (1924). Manuel de droit commercial (y compris le droit maritime). 14 th edn.; Paris: F. Pichon et Durand-Auzias.
  24. (1998). Droit commercial; sociétés commerciale. 6 th edn.;
  25. (1953). Giving Shareholders Power to Veto Corporate Decisions:
  26. (1958). Close Corporations: Law and Practice.
  27. (1998). The Choice of Stock Ownership Structure: Agency Costs, Monitoring, and the Decision to Go Public.”
  28. (1996). Taxes and Organizational Choice: An Analysis of Trends,
  29. (1927). Des SARLs Etude critique et commentaire pratique la loi du 7 mars 1925. Paris: Lib des juris classeurs.
  30. (2001). minoritaires: sociétés ne faisant pas appel public à l’épargne.
  31. Fereol. 1882. Répétitions écrites sur le code de commerce. 8 th edn.;
  32. (1965). The Limited Partnership Association—An Alternative to the Corporation for the Small Business with ‘Control’
  33. (1929). Corporate Advantages without Incorporation.
  34. (1985). The Economic Institutions of Capitalism: Firms Markets, Relational Contracting.
  35. (1985). Shareholder Protection, Compulsory Acquisition and the Efficiency of the Takeover Process.”
  36. (1995). Insider Ownership and the Decision to Go Public.”
  37. (1995). Block Investment and Partial Benefits of Corporate Control.”

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.