What does it mean to say a business association is a legal person? The question, phrased in different ways, has threaded through the law of business organizations for at least two centuries.
When we say a business association is a legal person we may simply be saying that the law treats the business as existing apart from its owners with the ability to, for instance, have property titled in its name, to enter into contracts, or to continue to exist even when the natural persons who are its members change. The claim can also entail more metaphysical assertions, as when in the late nineteenth century some argued that the corporation was a ‘real entity’ with a will and existence apart from its owners. In the United States, legal personhood has been tangled up with the question of whether corporations can claim some of the rights granted to natural persons under the US Constitution. Most recently, law and economics scholars have recast the issue as a question of whether a business’s assets are separated out from those of its owners, and the degree to which each are shielded from the others’ creditors.
My new article, The Personification of the Partnership, forthcoming in the Vanderbilt Law Review, provides a surprising new perspective on legal personhood by looking at an often-overlooked business form, the partnership, and at largely forgotten debates over whether the partnership should be viewed as a legal person separate from its partners. From the 1880s to the 1910s, scholars and practitioners in the United States hotly debated whether the partnership should be treated as a legal person—whether it was an ‘aggregate’ or ‘entity’. The common law had generally treated the partnership as an aggregate, having no legal existence apart from its owners—a partnership could not, for instance, hold property or maintain a lawsuit in its own name. Beginning in the 1830s, however, a few English reformers claimed that accountants and businessmen treated the partnership as a body separate from its partners, and that the law should follow this ‘mercantile’ approach. This proposal made little headway in England, but found enthusiasts in the United States, who argued that adopting the entity view and giving the partnership a separate legal existence would bring coherence to partnership law and align it with the ways partners actually viewed their firms. Advocates of the traditional view fought back, claiming that a partnership was best seen as nothing more than its members.
These disputes culminated during the drafting of the Uniform Partnership Act (UPA). The earliest draft of the UPA embraced the entity theory of partnership, but after several twists and turns the final version, adopted in 1914, rejected the reformers’ proposals and codified the view that the partnership was an aggregate, not a separate legal person. Guiding this decision was a rarely appreciated aspect of the legal personhood debates, one almost always overlooked today: the moral consequences that were believed to flow from treating a business association as a distinct legal person. Although the entity draft of the UPA would not have granted partners limited liability—partners would still ultimately have been liable for their firm’s debts—the insertion of a legal person, however insubstantial, between a partner and the partnership’s creditors proved too much for the framers of the UPA, who feared the change would disrupt the direct relationships that the drafters of the UPA saw as central to partnership law. Were the partnership a separate entity, they believed, partners would no longer treat the partnership’s obligations as their obligations. At a summit of partnership experts held in 1911, the eventual drafter of the UPA, University of Pennsylvania Law School Dean William Draper Lewis, made this plain when he stated that ‘[s]o far as business men now separate their own personality from the personality of the firm . . . they tend to do acts as a firm which lower the moral standards of the community. . . .” Adopting the entity view, he warned, would in his ‘opinion, and I think in the opinion of others of much more experience than myself, be a direct blow to the commercial morality of this country’.
Along the way the Article also touches on the divide between partnership and corporation that is a basic feature of Anglo-American business law; how legal influences flowed back and forth across the Atlantic; recent theoretical writings on the business entities’ essential features; our understandings of late nineteenth-century American legal thought and education; and the idea that some forms of business are more moral than others. It closes by showing how, even today, we have not quite resolved the aggregate-entity question.
Harwell Wells is the I. Herman Stern Professor of Law, Temple University James E. Beasley School of Law.