1. Describe the typical evolution (or “life-cycle) of a U.S. Corporation. Why do companies evolve this way? Why do we have so many different types of business organizations (ie., LPs, LLCs, PCs, etc.)? In other words, what benefits do they offer, and what are the limitations?.
2. Exactly what is it that corporate managers are doing to achieve the primary goal of the corporation? How does this fit in with ethics and social responsibility?.
3. Describe how time preferences for consumption and productive opportunities interact to determine the required rate of return on investments?.
4. Why are secondary stock markets so important to corporations?.
5. Explain the three types of trading procedures that are used in secondary markets?.
1. A corporation is a entity having legal existence in the eyes of the statute. They were initially evolved only to work. The typical evolution of a U.S.Corporation took place in the following manner:
Licenses for the conduct of business by the corporation were given for a limited period of time which could be revoked anytime because of violation of laws.
The activities of the corporation should be only towards fulfilling of the purposes stated in the charter of the company. They were not allowed to diversify from the charter (Beale. 2014).
Corporation were not allowed to own any kind of shares and debentures in other corporations and neither were they allowed to acquire assets which were irrelevant for fulfilling their purpose.
They had to be very careful in determining other work area . It should be against public interest, if so then such corporations would be terminated.
Along with the corporation itself, the owners and the managers running the day to day business of the corporations will be held liable for such acts which are criminal in nature while discharging their duties.
No kind of charity should be made to the political parties or the charitable institutions (Lasn, 1999).
The same was in force for as long as a 100 years until and unless the owners of such corporation started to revolt against the rules. The corporations had no say until and unless in the 19th century there was a tiff between the civil society and the corporation so much that the corporation started to make huge profits and take undue advantages of the situations arising during the civil war. The power of U.S. Corporations rose to such an extent that they were believed to be more powerful economically than many countries also. The modern day corporations can also buy and sell other corporations stock, they can employ workforce to work at the negotiated wage and salaries. And they are seen by the statute of a separate legal entity. Thus this is how the U.S. Corporations evolved (Kaplan. 1998).
There are many types of business organizations namely:
LLC (Limited liability Company): The LLC is a form of organization where the liability of the owners is limited to the extent of their ownership rights in the company. It is a combination of a corporation and a partnership firm’s features. The owners of a LLC are the only members and it is formed for a specified time frame. The personal assets of the owners are protected and not attached to the liabilities of the LLC. It is governed by the state laws and hence the legislature varies state wise. Banks, Non-profit organizations and insurance companies do not fall under the purview of LLC (Hilt. 2014). The disadvantage of such a form of organization is that there is a fees to be given to the state along with the other paper formalities and in some states there is also an annual fee that LLCs will have to pay to the state Further LLC is formed for a fixed duration and the formalities are too many and too complex (Morrow 2005).
LP (Limited Partnership): Limited partnership is a combination of general and limited partners. As the name suggests general partners take more risk as they participate in the daily work and hence are personally liable for their acts whereas limited partners are liable only to the extent of their capital contribution in the partnership firm. It is good for investors who are very conservative and have a low risk taking appetite. It provides various tax deduction benefits to the employees, Its life is not limited to the existence of a limited partner. Thus there is a uniformity in the tax reforms also. However its formation is too complex (Dugger. 2003).
2. The primary goal of any corporation is to maximize profitability and the value of the investment of the shareholders. Its main goal is to derive maximum profit but the modern day corporations have a changed view. For them delighting their customers is also a part of the primary goal. They aim at providing new innovative , more eco-friendly , customer specific products which attracts them thus by operating in such a manner they in a way fulfil their goal of making more profits (Joseph. 2013).
Today’s changing needs and outlook of the society desires organization to inculcate the practice of ethics and social responsibility within their pre-defined goals. The managers have to choose between the right and the wrong while spelling out their primary goals and the ways and means to achieve them. Also goals have to be such which ingles the ethical standards well with the social responsibility of the organization. They have to decide what goods and services to produce, the method of production so as to achieve economies of scale of production along with meeting shareholder’s interests as well as protecting the society from the various hazards of the production process (Dimitriades 2007). Thus thinking of adapting a more ethical manner of work along with serving to the society as well as the shareholder’s comprises of what is known as the primary goal of an organization in today’s dynamic world. Such as the Corporate Social Responsibility which has been made mandatory for the corporations to adhere to is basically working for the societal benefits along with ensuring that the corporations also gain while discharging their responsibility towards the society they operate into (Denning 2011).
3. Production opportunities means the ability of a firm to convert the capital investments into benefits and achieve the required rate of return. In a lay man’s language it is results that an investment done today would fetch in the future. The time of investment is very important for achieving the levels of production which would help the corporation achieve its required returns. Similarly time preference for consumption also helps to determine the required rate of return on investments. It differs from person to person. People can use their investments either for current consumption or for saving the same for future consumption depending upon the return forecasted. Where the interest rates on savings are high the time preference for consumption should be low as it would fetch more return on investments if the present money is utilized for saving purposes instead of consuming it immediately and vice versa. Thus both factors are important to determine the required rate of return on investments (Brigham & Ehrhardt, 2008).
4. Secondary markets is a free market wherein the investors by shares of other companies directly from other investors rather than from the company itself. There importance from a corporation’s point of view is enumerated as under:
The secondary market are the pulse of a country’s economy It determines how the economy is functioning as a whole basis the share prices of the corporations.
The secondary market help the corporations to understand how is their firm valued in the eyes of the investors , creditors and the government.
The prices of the shares of a corporation already trading in the secondary market will have a bearing on the price that the corporations may get on its fresh issues (Estes, 2014).
5. Three types of trading procedures that are used in secondary markets are:
Direct method: In this method the buyer and the seller find themselves and fix the best price amongst each other. The frequency of the transaction is very minimal hence does not attract brokers. This is a very inefficient and less popular procedure basically applicable only for the sale of private company’s common stock.
Auction: Another popular method of dealing in secondary market is through auction of shares and stock. Here the bargaining for the price takes place in groups The secondary market appoints an auctioneer who is responsible for the fair conduct of this procedure. The most regulated market for this is the New York Stock Exchange
Broker: This is the most preferred trading procedure used in a secondary market. A broker is appointed who earns a brokerage for getting the buyers and the sellers at a common platform. A broker provides valuable information about the stocks being traded in the secondary market to the potential buyers and sellers and earns a brokerage over the transactions that they agree to on the basis of the information he provides (Drake. 2015).
References:
Lasn, W.K. (1999). The Uncooling of America, The History of Corporations in the United States. Retrieved from https://www.thirdworldtraveler.com/Corporations/Hx_Corporations_US.html
Brigham, E.F.,& Ehrhardt, M.C. (2008). Financial management , Theory & Practice. USA: Thomson Learning Inc.
Morrow, S. (2005). LLC or LP: What’s Best for your Business?. Retrieved from https://www.legalzoom.com/articles/llc-or-lp-whats-best-for-your-business
Denning, S. (2011). Is the Goal of A Corporation To Make Money?. Retrieved from https://www.forbes.com/sites/stevedenning/2011/09/26/is-the-goal-of-a-corporation-to-make-money/#5c2e1a517658
Dimitriades, Z.S. (2007). Business Ethics and Corporate Social Responsibility in the eEconomy : A Commentary. Business and Organization Ethics Network. 12(2)
Dugger, A. (2003). What is Limited Partnership?- Definition, Advantages & Disadvantages. Retrieved from https://study.com/academy/lesson/what-is-a-limited-partnership-definition-advantages-disadvantages.html
Estes, S. (2014), The Impact of Secondary Markets Transactions on Value. Retrieved from https://www.alvarezandmarsal.com/impact-secondary-market-transactions-value
Joseph, L. (2013). Importance of Business Ethics and Corporate Social Responsibility. Retrieved from https://blog.udemy.com/importance-of-business-ethics/
Drake, P.P. (2015). Module 3, Markets and trading Mechanics. Retrieved from https://educ.jmu.edu/~drakepp/investments/modules/module3.pdf
Kaplan, S.N. (1998). The Evolution of U.S. Corporate Governance. Capital Ideas. 1(2).
Beale, S.S. (2014). The Development and Evolution of the U.S. Law of Corporate Criminal Liability. Retrieved from https://scholarship.law.duke.edu/faculty_scholarship/3205/
Hilt, E. (2014). History of American Corporate Governance: Law , Institutions and Politics. NBER Working Paper No 20356
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