8 - club memberships, limousines, and posh offices provided...

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Could a limited liability advantage of a corporation also lead to an agency problem? Why? The Limited Liability Company (LLC) is a newer form of business entity. It has advantages over corporations and partnerships. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, unless the LLC’s articles of organization and operating agreement provide that the LLC is to be managed by managers. The goal of the manager should be to maximize the wealth of the owners of the firms; thus, managers can be viewed as agents of the owners who have hired them and given them decision- making authority to manage the firm for the owner’s benefit. In practice, managers are also concerned with their personal wealth, job security, lifestyle, prestige, and perquisites such as country
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Unformatted text preview: club memberships, limousines, and posh offices provided at company expense, of course. Such concerns cause managers to pursue objectives other than shareholder wealth maximization. Financial economists recognize the agency costs caused by conflicts between the interests of shareholders and managers. This conflict between the goals of a firms owners and managers gives rise to managerial agency problems, which Jensen and Meckling (1976) define as costs arising from the likelihood that managers may place personal goals ahead of corporate goals. These costs can be minimized by, for example, tying managements compensation to stock price so they have an incentive to work to maximize stock price. Such contracts can be effective if structured properly, although they have been criticized as providing excessive gains to managers when the entire market was rising. If members of an LLC manage the company, it should not lead to an agency problem...
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