Suppose that smithies a partner in a law firm wants

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Unformatted text preview: ners usually do not participate in the management of the firm or enter into contracts on behalf of the firm. 2. Decision making in a partnership can be complicated and frustrating. Suppose that Smithies, a partner in a law firm, wants to move the partnership in one direction, to specialize in corporate law. Yankelovich wants to move it in another direction, to specialize in family law. Who makes the decision in this tug-of-war? Possibly no one will make the decision, and things will stay as they are, which may not be a good thing for the growth of the partnership. Corporations A corporation is a legal entity that (1) can conduct business in its own name in the same way that an individual does and (2) is owned by its stockholders. Stockholders are people who buy shares of stock in a corporation. A share of stock represents a claim on the assets of the corporation. (Assets are anything of value to which the firm has legal claim.) A share of stock gives the purchaser a share of the ownership of the corporation. About 5.1 million corporations operate in the United States and account for about 83 percent of all business receipts. What does it mean when we say that a corporation is a legal entity that can conduct business in its own name? For purposes of the law, a corporation is a living, breathing entity (like an individual), even though in reality a corporation is not a living thing. Let’s say that a thousand people want to form a corporation and call it XYZ Corporation. The law treats XYZ Corporation as if it were a person. We can see what this treatment means through an example. Suppose XYZ Corporation has a debt of $3 million and it has only $1 million with which to pay the debt. Legally, the remainder of the debt ($2 million) cannot be obtained from the owners (stockholders) of the corporation. It is the corporation that owes the money, not the owners of the corporation. The owners of the corporation have limited liability. Advantages of Corporations The advantages of corporations include the following: 1. The owners of the corporation (the stockholders) are not personally liable for the debts of the corporation; they have limited liability. To say that the stockholders have limited liability means that they cannot be sued for the corporation’s failure to pay its debts. They are not personally responsible for these debts. For example, if Turner is a stockholder in corporation X, and corporation X cannot pay off its creditors, Turner does not have to sell her personal assets (her house, car, and so on) to pay the debts of the corporation. She can Larry Page (left) and Sergey Brin (right) co-founded Google, Inc., in September of 1998, in Menlo Park, California. What reasons might they have had for forming a corporation? corporation A legal entity that can conduct business in its own name in the same way that an individual does. stockholder A person who owns shares of stock in a corporation. asset Anything of value to which the firm has a legal claim. limited liability A condition in which an owner of a business firm can lose only th...
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