Since the Centros ruling in 1999, Europe has evolved a two‐tiered system of corporate laws. This opens up the possibility of some horizontal regulatory competition between the corporate laws of the member states. Following a draft regulation on the European Private Company (SPE), an additional legal form tailored to the needs of small and medium‐sized enterprises (SMEs) is being proposed. We analyse whether such a supranational European legal form can be recommended from the perspective of the economic theory of legal federalism. We present a general theoretical framework for studying centralization/harmonization versus the decentralization of legal rules and regulations in regard to corporate law in the EU. Our analysis of the empirical evidence on horizontal regulatory competition and the advantages or disadvantages of such an additional legal form for SMEs shows clearly that it might render many benefits, compared with the existing situation of only (partial) horizontal competition.