The aim of this paper is to gain insight into how requirements for transitioning to circular economy creates new organizational forms in inter-firm collaborations, and ultimately how they stimulate the emergence of new institutions enhancing sustainability. Two strands of literature, one on circular economy and one on institutional analysis, provide the theoretical background for this research. Currently a clearly formulated and unified theory on the institutions of circular economy is lacking. Therefore this research compares and contrasts empirical evidence from cases derived from the textile industry in The Netherlands, and concepts derived from institutional analysis and literature on circular economy to inductively build a cohesive conceptual framework. Using information from cases we identified two pathways to transition into circular economy and to manage circular material flows. We define these pathways Status Quo arrangements (SQ), when firms focus on optimizing up-cycling technologies and infrastructure in their circular relations and collaborations, and Product as Service arrangements (PAS), to indicate a focus on providing products in service contracts. Chain coordination, contracting, and financial mechanisms were identified as key organizational elements for creating new pathways to transition into circular materials flows. However in analyzing these elements we also highlight differences between SQ and PAS arrangements. SQ arrangements may have implications at the level of formal rules, for example by creating a new industry standards for up-cycled fabrics. PAS arrangements may have wider implications, for example by reshaping ownership in service contracts and creating cascading activities. Moving ownership to the supply chain will result in increased responsibility for materials and will create an incentive for improving quality of products, including their environmental performance. This is expected to generate positive socio-environmental impacts at a system level as well. Moreover PAS arrangements may have bottom up effects at a formal institutional level, resulting in alteration and creation of formal rules, for example in terms of new approaches to the ownership of materials.