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Unformatted text preview: Chapter 18 Corporate Governance A-1 Appendix Choosing among the Legal Forms of Organization While large publicly traded corporations are prominent in today’s business environ- ment, other legal forms of organization play important roles in the economy. This appendix describes the major legal forms of organization and presents an economic framework for choosing among them. Descriptive Overview Profit Status Organizational forms can be divided into two major categories: nonprofit and for profit . The defining characteristic of a nonprofit organization is that the persons who control these organizations—including the board, officers, and members—are forbidden from receiving the organizations’ residual profits. Laws do not preclude nonprofit organiza- tions from making a “profit”; indeed, some regularly receive revenues that substantially exceed their costs. Nonprofit organizations receive significant tax benefits, and regula- tions require that their net surplus (“profits”) be used for social purposes, such as the arts, education, or charity. Most nonprofit organizations in the United States fall into one of two major groups based on the U.S. Tax Code: 501(c)(3) charitable organizations and religious congrega- tions and organizations and 501(c)(4) social welfare organizations. Nonprofit organiza- tions are private and self-governing. However, to qualify for nonprofit status, they must serve a public purpose. Nonprofit organizations are exempt from most federal, state, and local taxes; some receive tax-deductible contributions. For-profit organizations differ from nonprofit organizations in that they have “owners” who receive the residual profits. Typically owners of the residual claims have decision con- trol rights 51 in proportion to their ownership interests. For example, in most corporations shareholders have the right to elect the board of directors and to vote on key issues. Nonprofit and for-profit organizations co-exist in certain sectors of the economy, such as hospitals, nursing homes, and education. Organizations sometimes change their profit status. These facts suggest that profit status is not always determined by the nature of the activity; rather, it is an important decision initiated by the management of the organization. For-Profit Alternatives Within the United States, businesses are regulated primarily by state laws, which pro- vide companies with a menu of organizational choices. Table 18.1 (page A-2) presents the primary organizational alternatives that exist at the current time for for-profit organization. 52 The table also summarizes how these organizational forms vary along four important dimensions: (1) ownership of the residual profits, (2) assignment of decision control rights, (3) taxes, and (4) legal liability of the owners....
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This note was uploaded on 11/02/2010 for the course ECOS 3003 taught by Professor Andrewwait during the Three '10 term at University of Sydney.
- Three '10