Corporation

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The Corporation

The Partnership

The Proprietorship

The simplest, oldest, and most common form of business is the proprietorship. This is a firm in which the owner (proprietor) is solely responsible for the activities and liabilities of the business. But proprietorships have some disadvantages too. They tend to lack stability and permanence, it is difficult for them to raise funds for expansion, and their owners are personally liable for all debts of the business.

A partnership is simply a modified version of a proprietorship. That is, a partnership is an association of two or more people to carry on, as co-owners, a business for profit. A partnership has the same kinds of advantages and disadvantages as a proprietorship –but on a somewhat different scale. For example, partners can pool their funds to establish a business and they can combine their talents to manage it. However, they are jointly and personally liable for all debts of the business.

The third form of business organization, and the most important from an economic standpoint, is the corporation. Here is a definition that will be amplified in the following paragraphs:

A corporation is an association of stockholders (owners) created under law but regarded by the courts as an artificial person existing only in the contemplation of law. The chief economic characteristics of a corporation are

1) the limited liability of its stockholders;

2) stability and permanence;

3) the ability to accumulate large sums of capital through the sale of stocks and bonds.

The ownership of a corporation is divided into units represented by shares of stock. A stockholder who owns 100 shares of stock in a corporation has twice as much “ownership” as a stockholder with only 50 shares. Stockholders may participate in the profits of the corporation by receiving dividends in the form of a certain amount of money per share. If the corporation does not earn a profit, there may be no dividends.

One of the distinguishing features of a corporation is the limited liability of its stockholders. The owners of a proprietorship or partnership can be held personally liable for the debts of the business. However, stockholders in corporations cannot be held liable for any of the firm’s debts. For almost all practical purposes, the most that stockholders can lose if the business goes bankrupt is the money they paid for their stock.

The corporation has durability. Stockholders may come and go, but the corporation itself lives on. Indeed, some corporations in existence today were originally chartered hundreds of years ago.

Stockholders elect a board of directors, which is responsible for the management of the corporation. Each stockholder gets one vote for each share of stock owned. Some stockholders may thus elect themselves to the board if they own enough shares or if they can get the support of enough other stockholders. In large corporations, the board employs executives to manage the company and to report back to the board. In many corporations, one or more officers also serves as members of the board.

(From “Contemporary Microeconomics”by Milton Spencer)

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