The Evolving Partnership

I. INTRODUCTION The partnership form has rapidly evolved in the United States, particularly in recent years, as a result of competition between jurisdictions and among business forms. This provides an important lesson for Europe in the wake of Centros.1 This Article shows that competition creates a dynamic law that is responsive to the varied needs of modern firms. This is preferable to uniform lawmaking, which erroneously assumes that lawmakers can anticipate what optimal rules should be over time and across different firms. The recent Centros decision raises important questions about the future of European law, particularly the law of business organizations. By characterizing a corporation as eligible for the privileges and immunities of a full-fledged citizen of its state of origin, including the right to establish a branch in a country outside its origin that is subject to home-state law,2 Centros sets the stage for increased jurisdictional competition for European business law. Although Centros does not eliminate the rule that the law of the country in which a firm has its "real seat" or main office governs its internal affairs,3 it invites erosion of this doctrine by giving some firms a way to avoid its effect. Centros might spur regulators either to more aggressive efforts to harmonize European business law,4 or to embrace jurisdictional competition for business law. This Article advocates the latter approach. Focusing on U.S. partnership law, which has developed recently in a setting of open competition among the fifty-one U.S. jurisdictions, this Article demonstrates that jurisdictional competition is preferable to a regime in which firms must comply with the rules of all states in which they do business, or in which a single lawmaking body provides all the rules. Until recently, partnership law was uniform across U.S. jurisdictions, all but one of which had adopted the 1914 Uniform Partnership Act almost verbatim. During this stable era of partnership law, the partnership form was characterized by decentralized management directly by the owners, personal liability of members, and dissolution upon dissociation of a member. These features kept partnerships closely held, predominantly family affairs. But partnership has always contained within it powerful seeds for change. Partnerships have been governed mostly by contract, unlike corporations, which are constrained by the concept of "state creation." These seeds have now germinated. The stable era of partnership ended in the United States around 1988 and was replaced by a period of rapid development and change. Partnership law itself is now nonuniform across U.S. jurisdictions. More importantly, the partnership form itself has split into subforms, including the limited liability company (LLC) and the limited liability partnership (LLP), that provide a continuous spectrum of forms. This recent history in the United States holds important lessons for Europe as it embarks on partnership law reform. A single set of business association rules issued by a central planner cannot meet the needs of various types of firms or respond to firms' changing business needs. Central planning is hostage both to inherent limits on human knowledge and foresight and to interest group politics. Rather, firms should be able to pick suitable rules by making both "horizontal" choices among the various jurisdictions and "vertical" choices among business forms available within jurisdictions. Moreover, more efficient rules can emerge from jurisdictional competition for business formations, and from an evolutionary process in which more efficient forms become more prevalent and less efficient forms fall into disuse.5 The primary engine of efficiency is the parties' ability to contract for the applicable law, including selection of a firm's internal governance rules through choice of the state of organization.6 There is significant evidence that permitting horizontal and vertical choice of business forms produces efficient outcomes. …