Partnership: It shares the advantages and disadvantages of the sole proprietorship. Ability to pool capital Combining service-oriented expertise and skill. Disadvantage is that each partner bears unlimited personal liability for the activities of the partnership.
Corporation: It is its own legal entity, as if it were a person, corporation can sue and be sued in court. Corporation must pay tax regardless its owner already pay taxes Real individual are required to act on behalf of the corporation. Corp is formed by filing a document with the state gov that sets forth how many shares of stock are authorized for issuance to share-holders. Advan: Limited liability of the owners of the company ,Ability to raise capital and to share risk, Disadvan: Shareholders are exposed to double taxation. Expensive to run. Suffer from potentially serious governance problems
Separation of ownership and control Agency problem (principal problem), Managers would only pursue enough profit to keep stockholders satisfied while managers sought self-serving gratification in the form of perks, power, and or fame. Solution to agency problem Incentive solution: Aligning executive incentives with shareholder desires. Tie the wealth of the executive to the wealth of the shareholders. Seconde solution: is to address the weakness in the monitoring by the board and to set up additional monitoring mechanisms for monitoring the behavior of managers.
Can shareholders influence managers?Hard. Uninvolved shareholder will return proxy stmt and vote on mgmt’s will.
Monitors.1Incentive contracts that supposedly align executive incentives with shareholder interest 2Accountants and auditors who check the firm’s financial statements 3Boards of directors who represent shareholders 4Investment banks and analysts who bring securities to the public for sale and evaluate them 5Creditors and credit rating agencies who monitor the firm’s ability to handle debt 6Shareholders themselves 7The corporate takeover market where supposedly good firms take over bad firms. 8The securities and exchange commission who are the official regulators of the securities industry, 9Government and the governance of international firms 10The government’s role in the survival of firms Corporate citizenship that should instill a sense of corporate responsibility to the executive.
Chapter 4 Five board functions：1To hire, evaluate, and perhaps even fire top management, with the position of CEO being the most important to consider. 2To vote on major operating proposals (large capital expenditure and acquisitions)3To vote on major financial decisions (issuance of stocks and bonds, dividend payments, and stock repurchase.)4To offer expert advice to management5To make sure the firm’s activities and financial condition are accurately reported to its shareholders.Most important internal monitor: board
The board’s legal duties. Model Business Corporation Act All corporate powers should have board. Directors to act in good faith and with sincere belief that their actions are in the corporation’s and shareholders’ best interests. In order to abide by the spirit of this rule, directors have certain responsibilities, otherwise known as duties. directors have a fiduciary duty to conduct activities to enhance the firm’s profitability and share value. directors also have a duty of loyalty and fair dealing, where they must put the interests of shareholders before their own individual interests. Directors must also exercise a duty of care by doing what an ordinary prudent person would do under the same position and circumstances. The board of directors has a duty of supervision, in which they should establish rules of ethics and ensure disclosure. Meetings , make sure accurate financial report and objective auditing are taking place.