Corporations
G751
Eric Rasmusen,
[email protected]
March 4, 2014
1
The Textbook Firm
Fixed cost, rising MC. Possibly sharp
capacity.
Other firms can enter in the long run.
Rents and quasi-rents.
Viner’s LR cost curves, including the
U-shaped one and the CRS one.
Natural monopoly.
2
The Size of a Firm--- Coase
Transaction costs vs. management
costs.
Why not one big firm?
3
Classic Papers
Ronald H. Coase, The Nature of the Firm, 4
ECONOMICA 386 (1937).
Armen A. Alchian & Harold Demsetz, Production,
Information Costs, and Economic Organization, 62 AM.
ECON. REV. 777 (1972).
Michael C. Jensen & William H. Meckling, The Theory of
the Firm: Managerial Behavior, Agency Costs, and
Ownership Structure, 3 J. FIN. ECON. 305 (1976).
Sanford J. Grossman & Oliver D. Hart, The Costs and
Benefits of Ownership: A Theory of Vertical and Lateral
Integration, 94 J. POL. ECON. 691 (1986) (a firm consists
of "those assets that it owns or over which it has control")
4
What is a firm?
Knight: Assets with a residual claimant, in a risky situation.
Coase: A collection of assets ruled by authority.
Alchian-Demsetz: Monitoring framework.
Jensen and Meckling: A Nexus of Contracts. The shareholders aren’t the
owners. They aren’t special.
Hart: Property owned in a particular way to avoid The hold-up problem.
Me: a collection of assets with the same owners that are used for earning
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money, as well, perhaps, as for other things. Boring, noneconomic definition.
Dimensions
1. Register with the state?
2. Required governance structure?
3. Legal Personality?
4. Limited Liability?
5. Tradeable ownership?
6. Perpetual Life?
6
Formation
Agreement
between two
or more
parties. No
state filing
required.
Certificate of
Formation
Dissolved if entity
ceases doing
business or upon
death of the sole
proprietor
Dissolves
upon death or
withdrawal of a
partner, unless
agreement
Perpetual
Liability
Sole proprietor
has unlimited
liability
Partners have
unlimited
liability
At least one general
partner has unlimited
liability
Operational
Requirement
Relatively few
legal requirements
Relatively few
legal
requirements
Management
Sole proprietor
has full control of
management and
operations
Typically each
partner has an
equal voice,
unless
otherwise
arranged
Some formal
requirements, but less
formal than
corporations
Limited partners are
excluded from
management unless
they serve on the
Board of Directors
Taxation
Not a taxable
entity. Sole
proprietor pays all
taxes
Not a taxable
entity. Each
partner pays
tax on his/her
share of
income and
can deduct
losses against
other sources
of income
Files taxes as a
separate entity and
must meet certain
criteria to avoid being
taxed as a corporation
Duration of
existence
No state filing
required
Articles of
Incorporation
Articles of
Incorporation
Articles of Organiza
Sole Proprietorship, Partnership
fdgfd
(S = Small Business
Tax Election for the
Corporation)
Perpetual
Perpetual
Dependent on the re
by the state of forma
(S Election can be
terminated in which
case reverts to C
Corporation)
Shareholders are
typically not
responsible for the
debts of the
corporation
Board of Directors,
annual meetings,
and annual reporting
Shareholders are
typically not
responsible for the
debts of the
corporation
Board of Directors,
annual meetings,
and annual
reporting
Managed by
directors who are
elected by
shareholders
Members are not typ
the debts of the LLC
Taxed at the entity
level. If dividends are
distributed to
shareholders,
dividends are also
taxed at the
individual level.
(DOUBLE
TAXATION)
No tax at the entity
level. Income / loss
is passed through
to shareholders.
*1-100 shareholders
*No non-resident
aliens
If properly structure
the entity level. Inco
through to members
single-member LLC
(pass-through); defa
members is partners
entity can also elect
or S-Corp)
dfgdfgg
Managed by
directors who are
elected by
shareholders
Some states impose
but generally less fo
corporations
Members usually ha
agreement that outli
be member managed
managed
Pass through
income/loss
Yes
Yes
Yes, if requirements
are fulfilled
No
Yes
Yes
Transferability of
interest
No
No
Yes, pending approval
Shares of stock are
easily transferred
Yes, observing IRS
regulations*
Possible, dependent
agreement restrictio
7
Trusts
These are NOT contracts.
The grantor gives property to the trust,
under care of a trustee. The trustee has
legal title (ownership). The grantor says
who the beneficiary is--- who has the
“equitable title”.
The trust pays tax, but is not a legal
person---it cannot sue. No registration with
the state is needed, unless it is a charity.
Civil law countries don’t have trusts.
8
Nonprofit Corporations and
Charitable Tursts
They raise capital through donations.
They may or may not be tax exempt--they are if they are a nonpolitical
charity.
They file form 990.
http://www.rockefellerfoundation.org
/uploads/files/27cb690a-bfce-4ff9a839-80bca57ee49a.pdf
9
Corporate Objectives
To help shareholders? Stakeholders?
Profit? Religion? Daytime Baseball?
Duty of Loyalty
Duty of Care
Business Judgement Rule
10
Hansmann and Reinier Kraakman,
Henry Hansmann and Reinier Kraakman, The End of History
for Corporate Law, 89 GEORGETOWN L. J. 439 (2001)
Henry Hansmann and Reinier Kraakman, REFLECTIONS ON
THE END OF HISTORY FOR CORPORATE LAW, August
2011 http://ssrn.com/abstract=2095419 Forthcoming in Abdul
Rasheed and Toru Yoshikawa, eds., Convergence of Corporate
Governance: Promise and Prospects (Palgrave-MacMillan
2012).
11
Eisenberg
Melvin A. Eisenberg, The Conception
That the Corporation Is a Nexus of
Contracts, and the Dual Nature of the
Firm , 24 J. Corp. L. 819 (1998),
http://scholarship.law.berkeley.edu/facpu
bs/547
12