This glossary entry was published yesterday. Does it work? It would be good to know if this is the sort of detail people want. There are missing glossary entries related to this as yet and they will be added as soon as I can get to them.
A company is legal entity created by law through a registration process that is treated as a separate legal person from those who set it up. It is called a corporation in some countries.
Almost all countries allow for the creation of companies but the rules by which they do so vary considerably. Most offer limited liability, which means the members of the company are not liable for its debts if it were to go bankrupt.
When companies were first made available it was thought that this was a privilege, and certain duties were demanded in return, not least that accounts and information concerning the ownership and management of the company should be put on public record. That principle has been undermined by offshore secrecy and a resulting downward trend in domestic regulation in many jurisdictions. This is part of the so-called race to the bottom in regulation.
The members of a company are either shareholders or guarantors. Shareholders own shares in a company. Most companies have shares. Those that do not are usually described as limited by guarantee. Their members agree to make a fixed donation not exceeding an agreed sum in the event that the company becomes insolvent and has to cease to trade. Companies limited by guarantee cannot usually pay dividends to their members and as such are usually used for not-for-profit activities such as community groups, charities, non-governmental organisations and the like.
Companies are regulated by the legislation of the jurisdiction in which they are incorporated. This regulation can vary. At best it requires that the following be made available on public record:
- The constitution of the organisation
- A full list of members
- The names of those who manage the organisation (its directors)
- The locations where the company trades and its registered offices with contact details being provided
- The full financial statements or accounts of the company for each accounting period to an accounting reference date.
Few countries require all this data for all companies and many provide considerable exemptions for smaller companies meaning that limited liability companies can frequently be operated almost anonymously. As such they are very often a perfect vehicle for those wishing to unaccountably evade tax, most especially on trading income. This is facilitated if there is a weak Registrar of Companies in a jurisdiction as there is in the UK.
The directors of a company are supposedly answerable to its shareholders but in most cases shareholders actually have very limited control over the activities of those directors.
Shareholders have no direct claim over any of the assets of the company in which they own a share if it is solvent and continuing in trade. They usually only have entitlement to vote at annual general meetings (and then usually only to accept the accounts as presented to them and to appoint directors) and to receive dividends from the company if it decides to pay them.
If a person has more than 50% control of a company then they have the power to appoint its board and this gives them considerable power over its operations. If the person owning more than 50% of the shares in a company is another company then the company y whose shares are owned is called a subsidiary company and the company that owns them is called a parent company and together they are called a group of companies.
Each company within a group has to prepare its own accounts. The parent company is usually required to prepare what are called consolidated accounts for the group as a whole.
Limited liability companies can create considerable problems in creating fair markets, as Adam Smith, the reputed founder of modern economics noted in his seminal work on this issue, the Wealth of Nations. These include:
- Reckless behaviour because of the provision of limited liability resulting in fraud on the creditors and members of a company.
- Tax fraud because the shareholders are not liable for the tax debts due by the company that they own.
- Fraudulent trading hidden behind the anonymity that companies frequently permit.
- Difficulty in holding a company to account for its actions because it fails to file information required of it with a Registrar of Companies.
Despite considerable awareness of those issues few governments anywhere seem willing to tackle them.
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Richard, I know you are very busy, but can I suggest an edit for this sentence
“The directors of a company are supposedly answerable to its shareholders but they actually have very limited control over the activities of those directors once appointed in most cases.”
It is a bit unclear as to whether it is the directors who have limited control or the share holders. I know it’s not stylistically very pretty, but I’d suggest substituting ‘shareholders’ for ‘they’ and removing ‘in most cases from the end of the sentence and inserting it after ‘but’. Also, completely deleting ‘once appointed’ (or is ‘once appointed’ very pertinent?)
Thus:
“The directors of a company are supposedly answerable to its shareholders but in most cases shareholders actually have very limited control over the activities of those directors.
Done
Thank you
Perhaps this is just my perspective, but in your glossary on the register of companies you write this: “limited liability companies and other entities such as limited liability partnerships, foundations and trusts whose existence is regulated by the jurisdiction in question as a consequence of their registration or incorporation in that place.” We could of course add others; sole trader, conventional partnership and so on.
I am inclined to observe all of these as different ways to pursue commercial obectives, for different purposes or different reasons and in different circumstances; and (ideally) I think I would look at all of this as a form of interwoven tapestry, if may resort to metaphor; bringing out the strengths and weaknesses of each option by looking at this as a comparative exercise of selectivity from a palette of options, from the simplest and easiest to the most complex. I accept that may seem a step too far, but I feel that we can only understand business by understanding why people select one solution, rather than another, and move from simplicity to complexity (often for tax reasons, or secrecy reasons).
Always look behind the curtain.
I am not sure that without limited liability that disclosure can be demanded
No, it isn’t, but that was one of the matters I was trying to bring out. The legal, commercial vehicle people may choose will, at least in part be a function of the requirements for disclosure; probably disclosure and tax are the principal factors in deciding what are the benefits and drawbacks of each form of legal framework, from the perspective of real world decisions.
But how would you have a Registrar fir things that do not need to be registered?
Although I would note that we did once have a Registrar of Business Names for any business nit trading in the name of a sole proprietor
My understanding is that there is such a thing as an “Unlimited Company” which can be registered at Companies House, and that there are a few thousand such – which is the limit of my knowledge.
And surely, once you get beyond a private individual trading as such, registration, and what that entails (in disclosures, etc) are purely a matter of what legislation actually or potentially require.
They are so rare that they inconsequential but I will add them
May I add to this discussion by saying that the point I made about non-registered approaches was because I thought it may be revealing in this glossary item to frame it by asking; why would someone register a company; or why would it not be attractive?
I am thinking about it
On the subject of the glossary in general, H is for hyperinflation and it follows that V is for Venezuela, W for Weimar etc. The necessity there is to counter some folk howling about hyperinflation when other folk trying to explain how govt spending really works. We are so sadly miseducated in these matters, and not by chance I fear.
Added to my list to do
A company is also an institution with lobbying power – able to unduly influence government policy – I don’t know whether you think that has any relevance or not – lobbying as individual companies if big enough or in groups if smaller – might be more related to ‘monopolies’ if you are including that?
Worth adding…
Not as worrying here as the US bit the aggregation of power is serious and so well worth saying