Regulatory Partitioning as a Key Function of Corporate Personality

Abstract

Corporate personality entails the separation between the legal spheres of the entity and its shareholders. This chapter highlights the critical economic role of what I call regulatory partitioning, which is the distinction between the entity and its members for purposes of the imputation of legal rights and duties. By enabling the corporation to operate as a “nexus for regulation,” regulatory partitioning produces significant benefits as well as costs. While regulatory partitioning is essential to the proper functioning of multi-member firms, it also supports legal arbitrage in tax and regulatory matters as a major driving force of incorporations around the world. The chapter also distinguishes between the frequently invoked notion of veil piercing as an exception to asset partitioning and a much more pervasive process I call veil peeking as an exception to regulatory partitioning.