A corporation is perpetual by default – but its lifespan can easily be limited through either a charter provision or contract. Does anyone actually do that? Indeed they do – and for good reason – as I explain in a new article.

Welcome to corporate governance in the fourth dimension.

Limited-life business entities – what I call “finite ventures” – are more common than one might think. Private equity funds are structured as 10-year limited partnerships. Venture capital funds follow the same model. SPACs must complete a merger within two years or liquidate. Lloyd’s of London, one of the most famous names in insurance, is not an insurance company at all but a marketplace of syndicates, each organized with a three-year term. Looking back in history, early American corporations – canal companies and the like – were typically limited-life, not perpetual. Even the famous Dutch and English East India companies from the 1600s began as a series of single-voyage finite ventures.

Why select limited life? In my article, I argue that finite duration is a valuable, yet underappreciated, corporate-governance tool for constraining agency costs.

When investors entrust capital to managers, there is always a risk that the managers will engage in self-dealing or waste. Fiduciary duties, mandatory disclosure, independent monitoring, and the market for corporate control all address this risk. Limited life, I argue, belongs on that list.

The mechanism is straightforward. Managers of a finite venture control the entity and its assets, but only for a fixed term. When the clock runs out, they must return investors’ capital and show their results. If they have performed well, investors will back them again. If not, future capital will be hard to come by. This dynamic – serial fundraising under the discipline of a hard deadline – keeps managers focused.

Limited life is most clearly visible in private equity and venture capital, where a firm’s ability to raise a successor fund depends directly on the performance of its predecessor. The fixed term ensures that at some point the market will measure the manager’s performance, and a poor track record will be punished through the reputation market.

The logic parallels “staged financing,” a well-known tool in venture capital. Rather than funding a startup with all the capital it will ever need, VC investors provide only enough for a year or two, then review results before committing more. Staged financing keeps managers on a tight leash – and limited life works the same way at the company level.

Limited life is not always the best choice, however, because perpetual existence has benefits of its own. Some businesses depend on capital lock-in: You do not build a global brand or a semiconductor fabrication facility on a 10-year clock. Some companies rely on perpetual assets – trademarks, trade secrets, land – whose value depends on continuity. And finite ventures face final-period problems: As the termination date approaches, managers may discount long-term considerations and focus on short-term payoffs, or rush to close a deal before the deadline rather than hold out for a better one.

How to choose? The article identifies practical factors to help guide the choice between finite and perpetual structure. Five factors favor limited life: The entity is particularly susceptible to agency costs; those costs would cause significant harm; the entity serves a finite purpose; its key assets have a limited life (such as a patent with a 20-year term); and it can be efficiently liquidated. Three factors favor perpetual life: a high value of capital lock-in, perpetual assets, and severe final-period problems.

The choice of duration also has doctrinal consequences. In earlier work, I argued that perpetual existence generates an implicit mandate to invest for the long term – reasoning later endorsed by the Delaware Court of Chancery in the landmark Trados decision. But what about entities that are finite? This article shows that directors of a limited-life entity owe a different obligation: not to manage for the indefinite long term, but to maximize value before the clock runs out.

My article closes by proposing novel applications of the limited-life form. One is the finite subsidiary: a perpetual parent corporation charters a subsidiary with a limited life to pursue a specific project. Management knows the clock is ticking and must deliver or dissolve the subsidiary. A finite subsidiary could also serve as a compromise between a public company and an activist shareholder pressing for divestiture – giving management time to find the right exit while assuring the activist that the matter will not be shelved indefinitely. Another proposal is the single-IP company, organized around a single patent with a lifespan that mirrors the patent’s fleeting term. Managers of such an entity would be intensely focused on extracting value before expiration.

The broader point concerns organizational design. Duration – the fourth dimension – deserves a more prominent place in the corporate governance toolkit. Just as we routinely consider capital structure, voting rights, and fiduciary duties when forming a business entity, we should also consider whether it should live forever. Perpetual existence is often the right choice, but duration should be a deliberate decision, not simply an unexamined default.

Andrew A. Schwartz is the DeMuth Chair of Business Law at the University of Colorado Law School. This post is based on his recent article, “Finite Ventures,” published in the Columbia Business Law Review and available here.