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How is a Corporation Different from a Partnership? [No. 86]

Professor Todd Henderson explains how a partnership only exists so long as the people who formed it agree to it. A corporation, on the other hand, exists independently of its founders or its managers. A partner may not transfer or sell ownership of the partnership, but corporations can sell shares of ownership in the company. Basically, in a partnership there is overlap between ownership and control while those are kept separate in a corporation. https://youtube.com/watch?v=fLlW-CxsjkE


Corporations live forever. A partnership ends when one of the partners leaves the partnership. Limited to the lives or whims of the partners. Corporations exist potentially forever. There are some companies in the United States that go back hundreds of years. And that just fits in with this idea that it's a separate legal person from its founders. When companies raise money, they give the people who contribute that money oftentimes something called a share or piece of stock. And that's just a claim on the assets or cash that the company would generate. So take a simple example. I form a corporation. I'm the sole shareholder of the corporation. I give it some capital and I'm going to also use my human capital to have it generate more wealth. As the only shareholder, all the cash that that company generates will come to me. I want to bring in some other people to invest in that corporation. I find nine of my friends. We each take an equal stake. We each own 10% of the company. I now have a claim, a 10% share in that corporation. And for most companies, I can freely sell those shares to somebody else. This is different than a partnership again. In a partnership, your partnership interest is not something that you can sell to someone else. Your partners wouldn't be so keen on you selling your law firm partnership to a stranger. In most corporations, with some exceptions, shares are freely transferable. If I own shares in Exxon Mobil, I am a shareholder, I can buy and sell those shares in a place in a market. We call that place maybe the New York Stock Exchange. And ownership is something that can change hands all the time. And then that fact leads inexorably to the last thing I'll mention, which is one of the key characteristics of a corporation. And that is the separation of ownership and control. For a typical thing like a partnership that's running a business, the partners are in control. They make all the decisions. And they're the people who are the economic owners of that business entity. In a corporation, it's a little different. Money is collected from people called shareholders. Those shareholders have money and they want to invest in a particular business, but they don't want to run that business. They don't know anything about social media, or raising chinchillas, or drilling for oil in Kazakhstan. All they want is to take money they have and turn it into more money. They hire people called managers, those managers who are first the board of directors, and then the people the board of directors hires, you might have heard of things like the CEO or chief operating officer, the COO. Those people make decisions for the corporation. And so you've got owners who have contributed money, and you've got managers who are in control of the corporation who probably haven't contributed any money.

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