Who owns the firm, and who runs it?
Four ways to set up a business, why a corporation should maximise its value, and what goes wrong when the people who run it are not the people who own it.
Four ways to set up a business
| Owners | One person, who runs it | Two or more partners | One or more; every owner may manage | Shareholders; a board oversees the managers |
|---|---|---|---|---|
| Liability for the firm’s debts | Unlimited: the owner’s own savings and home | Unlimited for general partners; limited partners risk only their stake | Limited for every owner | Limited: owners can lose only their shares |
| Life of the firm | Ends when the owner dies or quits | Usually ends when a partner leaves or dies, unless the agreement buys them out | Set by the owners’ agreement | Unlimited: it outlives its owners |
| How profit is taxed | Once, on the owner’s own tax return | Once, on each partner’s own return | Once: profit passes through to the owners | Twice: corporate tax, then tax on dividends |
| Raising money | Hard: the owner’s savings and personal loans | Limited to what the partners have or can borrow | Hard to raise debt or equity | Easiest: sell shares to many investors, who can resell them easily |
| Paperwork and running costs | Very little; few rules | A partnership agreement | Few: no required board, annual meeting or audit | Most: charter, board, annual reports, audit; costs mostly fixed |
A founder who needs outside money
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