Pay fees to provide corporation’s capital Members have rights, including right to elect directors Unlimited Liability Limited Liability Check earning capacity (future cash Only need to earning capacity Valuation flow) & investors’ wealth Check on changes in wealth of Less need to control managers Monitoring Costs investors because potential for loss smaller - Managers risking wealth Each investment risks all personal Can reduce overall risk without Diversification wealth putting personal wealth at risk Less: Costs of assessing investment More liquidity Liquidity cost & restrictions on moving interests/shares Obstacle to these decisions: No obstacle to diversification and Optimal Investment Decisions accounting for risk to personal optimal money making decisions wealth No single price for investment, Standard price for units of Market Price need to check each one investment with no personal risk Costs rise with more investors No increased costs with number of Economies of Scale (more due diligence to do) investors Transaction costs higher with unlimited liability need to negotiate limited liability into every deal – Tort liability: negligence - don’t negotiate limited/unlimited liability before negligence occurs normally what should starting point be? – England Medieval times-form of corporation used for public and ecclesiastical bodies, given charter from the Crown, were seen as separate legal persons, but not for business Merchant traded and guild regulated behaviour of individual members, not separate legal entity formed for foreign trade, Crown charters given that typically provided monopoly on trade in given area Joint stock companies-formed without reliance on Crown charter, make investments which would be used to buy goods for voyage, partnerships with provisions to make shares transferable, not separate legal entity 17th/18th centuries-Crown charters used to create domestic companies, also separate modern corporations
Pay fees to provide corporation’s capital Members have rights, including right to elect directors Unlimited Liability Limited Liability Valuation Check earning capacity (future cash flow) & investors’ wealth Only need to earning capacity Monitoring Costs Check on changes in wealth of investors - Managers risking wealth Less need to control managers because potential for loss smaller Diversification Each investment risks all personal wealth Can reduce overall risk without putting personal wealth at risk Liquidity Less: Costs of assessing investment cost & restrictions on moving interests/shares More liquidity Optimal Investment Decisions Obstacle to these decisions: accounting for risk to personal wealth No obstacle to diversification and optimal money making decisions Market Price No single price for investment, need to check each one Standard price for units of investment with no personal risk Economies of Scale Costs rise with more investors (more due diligence to do) No increased costs with number of investors Transaction costs higher with unlimited liability – need to negotiate limited liability into every deal Tort liability: negligence - don’t negotiate limited/unlimited liability before negligence occurs normally – what should starting point be? England Medieval times-form of corporation used for public and ecclesiastical bodies, given charter from the Crown, were seen as separate legal persons, but not for business Merchant traded and guild regulated behaviour of individual members, not separate legal entity formed for foreign trade, Crown charters given that typically provided monopoly on trade in given area Joint stock companies-formed without reliance on Crown charter, make investments which would be used to buy goods for voyage, partnerships with provisions to make shares transferable, not separate legal entity 17th/18th centuries-Crown charters used to create domestic companies, also separate modern corporations
Bullock%20-%20LAW%20315%20-%20Final.docx