Some of the disadvantages of this type of organization are the possibility of friction among the partners and consequent delay of action; the extension to the firm of credit based not on the firm property but rather on the total property of the members, and the consequent liability of each partner and his entire private fortune for the debts of the firm.
It is important to note that the partnership agreement should be very carefully drawn to cover in detail the relations of the partners, their duties and their rights, particularly as to their shares in the profits or losses of the firm.
The Corporation.—The corporate type of business organization is distinguished from the other types discussed:
1. By the freedom of each owner from the personal liability for the debts of the business to any greater extent than his stock interest in the business, though frequently in financial corporations, and in a few states for all corporations, his liability is double that stated.
2. By each share of ownership being evidenced by a formal document called a certificate of stock.
3. By each owner being allowed a voice in the affairs of the business only to the extent of his stock ownership therein.
4. By the necessity of securing from the proper authorities permission to do business.
5. By the necessity of complying strictly with the terms of this permit and submitting to certain requirements such as the filing of annual reports, payment of special taxes, and the like.
The owners of a corporation, or its stockholders as they are called, conduct the business through a board of directors which they elect for that purpose and they review its management periodically, usually annually. In this way they exercise indirect supervision over the business. This remoteness of personal interest and supervision has been somewhat overcome by electing to the board only those largely interested in the business, and by retaining on the board those whose ability as managers has been tried and proved. The board usually hires and delegates to others the active management of affairs.
The advantages of the corporate form of organization are: (1) it limits the liability of its owners; (2) it lends itself well to accumulation of the large funds of capital necessary for the promotion of large-scale enterprises; and (3) it secures through its board of directors a convenient and effective means of centralized control and management.