Boundaries are of the utmost importance because they establish size and shape. In so far as changes in the law affect the elements making up the boundaries of the firm, such changes can be expected to have an impact on the size and structure of firms. Theories which are capable of explaining how operations within the firm are different from those outside can be used to draw the boundaries of the firm and so to define its essence or nature. In this article three theories which give substance to the boundaries of the firm are presented and analysed.
The major debate in recent corporate legal theory has been between the coercionists and the contractarians. This can be caricatured as a dispute between those who follow institutional arguments, seeing the firm as a concession of the State, and those who follow economic theory, seeing the firm as a nexus of contracts.