Sunday, May 20, 2012

Corporate Forms

The Economist has a thoughtful article out this week on the changing nature of corporate forms.  It postulates that the public corporation has seen better days and that other alternative forms such as State Owned Enterprises and hybrid limited liability partnerships and LLCs might be on the rise.

The last decade has also been full of corporate scandal dated back to Enron, Tyco, and Worldcom 10 years ago.  I remember the surreal days when formerly giant companies like Worldcom or Lehman Brothers fell.  The end comes only after weeks of denials and attempts to sell the public on the enduring future of the company.   But, I don't think these scandals really say much about the future of the public corporation.   They are warnings about greed and remind us of the need for vigilant investors and regulation.  Yet these scandals are the extremes.  The middle does not follow in the footsteps of the extremes though it is affected by the regulation those scandals have inspired. 

However, the public corporation, for all its faults, is probably the best way to raise a large amount of capital if you can convince people to invest.  The downside is that return is demanded in the short term meaning that long-term investments are often overlooked.  State Owned Enterprises may have some strengths, but they also have all the weaknesses of the command economy practices in the bygone communist second world.  These include corruption, monopoly, lack of vision, fear of risk, etc.  The State Owned Enterprise might seem to be on the rise now mainly in China and in socialist states, however that is mainly due to extensive growth.  At a certain point that extensive growth will hit the wall after these emerging economies fully integrate their populations into the world economy.  Then they will have to try their hand at intensive growth which requires far more innovation and risk taking.  State Owned Enterprises have not proved particularly adept at this in the past. 

As to partnerships the article below about the problems with the law firm Dewey & Leboeuf illustrates the main disadvantage of large traditional partnerships.  Namely all of your investment is on the line and you can be adversely affected by the actions of your partners that you had little to with.   

Every corporate form, whether it be a sole proprietorship, family closely-held corporation, partnership, corporation, LLC, SOE, trust, or other entity, has its pros and cons. It is important to choose the best fit for any corporation and that fit may change over time. Hybrid business forms provide more of that needed flexibility and simplicity. The rise of the LLC and its use by small and large corporations alike is a sign of the future. 

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

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