Corporations G 751 Eric Rasmusen erasmuse indiana edu March

Corporations G 751 Eric Rasmusen, erasmuse@indiana. edu 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, 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 5 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 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 Organiza (S = Small Business Tax Election for the Corporation) Sole Proprietorship, Partnership fdgfd 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 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. If properly structure entity level. Income through to members -member LLC is disr through); default for is partnership taxati also elect corporate dfgdfgg Managed by directors who are elected by shareholders *1 -100 shareholders *No non-resident aliens Some states impose but generally less fo corporations Members usually ha agreement that outli be member managed Pass through income/loss Yes Yes, if requirements are fulfilled No 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/27 cb 690 a-bfce-4 ff 9 a 839 -80 bca 57 ee 49 a. 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-Mac. Millan 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