The Neglected Benefits of the Corporate Form : Entity Status and the Separation of Asset Ownership from Control

This essay reconsiders the role played by entity status and the separation of asset ownership from control in the corporate form, drawing on the experience of business people in the early 19th century U.S. for insights into the problems facing entrepreneurs and investors today in emerging market and transition economy countries. The essay argues that the unique contribution of the corporate legal form in the 19th century was that it allowed business people to create separate legal entities with potentially unlimited life to own the assets used in production. Since the legal entity owns the productive assets once the corporate form is used, ownership is necessarily separated from control. But this feature enabled business organizers to commit capital almost irrevocably to an enterprise, and helped to make the enterprises more financially stable. Using the corporate form, rather than partnership or so-called joint-stock companies (which were a type of partnership), business organizers could more easily accumulate organizational and other intangible capital, along with the specialized physical capital necessary to carry out complex business activities over an extended period of time. Scholars who have studied the problems of creating effective corporate law and governance institutions in developing and transition countries have emphasized the importance of protections for minority shareholders. But the need for legal and organizational mechanisms for locking capital into the enterprise, for preventing investors from stripping assets or otherwise pulling them out prematurely, is even more basic, yet it has largely been neglected in the literature so far. An appreciation for our own history of how businesspeople tried to find organizational forms that would enable them to build substantial and lasting business enterprises in the absence of strong legal, cultural and institutional supports sheds light on the important role played in this country of entity status and separation of control from financial contribution