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2005 U. Ill. L. Rev. 107 (2005)
The Economics of Limited Liability: An Empirical Study of New York Law Firms

handle is hein.journals/unilllr2005 and id is 119 raw text is: THE ECONOMICS OF LIMITED
Scott Baker*
Kimberly D. Krawiec**
Since the rapid rise in organizational forms for business associa-
tions, academics and practitioners have sought to explain the choice
of form rationale. Each form contains its own set of default rules that
inevitably get factored into this decision, including the extent to which
each individual firm owner will be held personally liable for the col-
lective debts and obligations of the firm.
The significance of the differences in these default rules contin-
ues to be debated. Many commentators have advanced theories, most
notably those based on unlimited liability, profit-sharing, and illiquid-
ity, asserting that the partnership form provides efficiency benefits
that outweigh any costs. In this article, the authors test these theories
empirically by examining the choice of organizational form by New
York law firms. Although the evidence indicates a strong shift from
the general partnership form to the limited liability partnership form,
a significant number of New York law firms remain general partner-
The authors conclude that the prevailing theories based on
unlimited liability, profit-sharing, and illiquidity are insufficient and
posit that, in contrast to the beliefs of many commentators, the choice
of form decision is quite complex. It depends on a variety of factors,
including the behavior of other similarly situated firms that the deci-
sion makers consider competitors for prestige and clients. Nonethe-
less, it is apparent that unlimited liability is generally considered bur-
* Associate Professor of Law, University of North Carolina, email: sbaker@email.unc.edu.
** Professor of Law, University of North Carolina, email: krawiec@email.unc.edu. We thank
workshop participants at Harvard, Georgetown, Fordham, Cincinnati, Wake Forest, Virginia, and
Florida State University law schools and participants at the conference Uncorporation: A New Age?
for helpful input on an earlier draft of this article. Gail Agrawal, Laura Beny, Bill Bratton, John
Coates, John Conley, Allen Ferrell, Dan Fischel, Caroline Gentile, Mitu Gulati, Melissa Jacoby, Don
Langevoort, Doug Lichtman, Tom Mroz, Mitt Regan, Larry Ribstein, Mike Seidman, Dan Tarullo,
and Kathy Zeiler provided useful comments and/or contacts at New York law firms. Finally, we thank
Briana Brake, Kim Garrabrant, Rachel Miles, Mike Pawlowski, and Kim Peterson for assistance in
gathering the data.

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