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What Purpose Does the Corporate Form Serve?

Professor Sean Griffith explains that the corporate form comes in lots of shapes and sizes. Corporations often evolve over time to answer different problems or provide different services. When discussing the purpose of corporations, it’s important to keep in mind that not all corporations are giant, publicly traded entities. Corporations, in the most basic form, are a collaboration to solve a problem. https://youtube.com/watch?v=lYyagDHIVPU


When we think about what a corporation is, it's important to remember that we're describing a thing that's evolution is ongoing. Any one particular corporation will be in a particular phase of its evolution. And then the corporate form itself is probably undergoing evolution. So when we ask what a corporation is, we have to keep in mind that there are many answers to this question and not just one. For example, if you think about a big publicly traded corporation, the kind that you would have to be able to buy shares of in the New York Stock Exchange, you're going to have one idea about what it is. It's big, it's monolithic, it has a lot of power and a lot of control. If that's your model for what a corporation is, that's very different from the corporation that you and I might form to engage in some small business in our community. So if you think about the kind of big corporations that do things that do things, that we think are wrong, if you have the sort of occupy Wall Street conception of what a corporation is, your starting point might be to want to fix the corporation, to try to come into the corporation from the outside and regulate what it is. But if your starting point is different from that, if your starting point is a bunch of individuals coming together to try to make or do something, your starting point might be different. For example, if you and I are going to go into business and we need capital, well, we're going to have to make the kind of arrangements between ourselves and between our investors that are desirable to our investors. If we want to hire employees, we're going have to make the kinds of arrangements that are desirable to our employees in order to get them to work for us. If we want to ultimately sell products, we have to make products, of course, that are desirable to the consumers. It's important to remember that corporations exist in a nexus of constraints. Those constraints are mostly imposed upon them by the markets in which they operate. The capital market first and foremost, the labor market for employees and the product market for the things that they make and do. The corporations that we see in the world today are responsive to all of those market constraints. And so it's important to think of them as from the beginning, rather than thinking of them at the end, as this machine, as this animal that we have to control. So let's think about corporations as the answer to a problem. What's the problem? The problem is not bigness or regulation. The problem is we want to make or do something. So there's a product that we have or that we have the idea for, that we need capital to create. Many corporate law cases involve the clash between the money person and the idea person. So let's say that we have an idea for a business or an idea for a product that fills a niche and that basically solves a problem that exists in the world today. Well, in order to make that product, we need capital. We're going to need to find the money to build the factory, to make the thing that we have the idea to make, that we need to go out and appeal to investors to do that. The corporation is just one kind of a solution to the problem. The different entity forms that there are, are different kinds of solutions to the problem. And I think that it's important to think about entrepreneurs and capitalists as trying to solve the problem as efficiently as they can. Again, that's where lawyers come in. The transaction cost engineer - what's the best organizational form for this business at this point in its life.

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