Question

• What is your opinion on corporate scandals and the role ethics plays? (1-2 page response)
• What are the differences between a partnership and a corporation? (1-2 page response)

Answer 1

DIFFERENCE BETWEEN PARTNERSHIP AND CORPORATION

A corporation is a legal entity that is separate and distinct from its owners.1 Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a "legal person."

A legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships.

The differences between partnership firm and company has been detailed below:

1. Meaning

A partnership firm is a form of business organisation in which two or more entities come together to run a joint business with the intention of earning profits.

A company is an incorporated entity that comprises of multiple members who have collectively contributed to its capital, formed with the intention of running a business.

2. Members

The members/owners of a partnership firm are termed as partners.

The members/owners of a company are termed as shareholders

3. Minimum and maximum number of owners/members

A partnership firm requires a minimum of 2 partners, the maximum number of partners is determined by the jurisdictional law.

A company requires a minimum of 2 shareholders. The maximum number of shareholders permitted is different for a private company (limited by jurisdictional law) and a public company (unlimited).

4. Mode of creation

A partnership firm comes into existence by entering into partnership agreement between the partners.

A company comes into existence by incorporation under the jurisdictional companies act. The memorandum of association and articles of association become its charter documents.

5. Necessity of registration/incorporation

It is not mandatory for a partnership firm to be registered.

As a company is an incorporated entity, registration under the law is mandatory.

6. Governed by

Partnership firms are governed by partnership laws of the specific jurisdiction. For example in the USA, every state has its own state level partnership law, the Indian Partnership Act in India etc.

Companies are governed by corporate laws of the specific jurisdiction. For example – Companies Act 2013 in India.

7. Separate entity

In the case of a partnership firm, whether it has a separate legal entity than that of its partners depends on the type of partnership. An unlimited partnership does not have a distinct and separate legal entity whereas a limited liability partnership has a distinct and separate legal entity.

A company is an incorporated entity and thus has a distinct and separate legal entity from its shareholders.

8. Liability

In an unlimited partnership, the partners are personally liable for debts and obligations of the business. In limited liability partnership, the liability of partners is limited generally to their respective capital contribution.

In a company, the liability of the shareholders is limited to their capital contribution. Shareholders are not personally liable for debts and obligations of the business.

9. Statutory compliances

Partnership firms generally have less statutory compliance that need to be followed.

Multiple and more stringent statutory compliances such as reporting requirements, accounting and auditing standards, etc are applicable to companies.

10. Management and decision making

In a partnership firm, management and decision making is the prerogative of the partners itself.

In a company, the management and to some extent decision making is delegated to a board of directors. Decisions are taken by board resolutions and in several cases by shareholder resolutions.

11. Perpetual succession

In case of a partnership firm, its continuity depends on the type of partnership and terms of the partnership deed. An unlimited partnership generally does not have perpetual succession.

A company has perpetual succession in that its continuity is not impacted by change of its members.

12. Preferred for

Partnership firms are preferred by medium size (especially family run business) where the number of partners required are limited and where limited number of statutory compliances are preferred.

Company form of business organisation is preferred by larger businesses that require a separate legal entity and that require extensive funding from multiple owners. Additionally several countries offer several tax and other benefits only to companies – businesses may prefer company form so as to take benefit of these sops.

	Corporation	Partnership
Life	A corporation continues until dissolved by law (unless a statute limits the time).	For the term specified in the partnership agreement: death of a partner may dissolve it earlier.
Entity	Has entity separate from its stockholder. A corporation can sue and be sued, hold and deal in property	Has no separate entity from the partners.
Liability	A stockholder has no individual liability; only his capital contribution is involved (exception: some state laws subject bank stockholders to double liability). Shareholders may be liable if the “corporate veil” is pierced.	General partners are individually liable for all partnership obligations: limited partners are usually liable only up to the amount of their capital contributions.
Changing Ownership	Stock can ordinarily be sold or otherwise transferred at will.	Change in interests may create a new partnership. Arrangements are necessary to end liability of ex-members.
Raising Capital	A corporation raises capital by sale of new stock or bonds or other securities.	Only by loan, or by new membership, or contributions of present members, or by remaking the firm.
Making Policy	Corporate authority is centered in its board of directors, acting by majority agreement.	Unanimous agreement of partners usually required, involves problems of personality
Credit	As separate entity, a corporation has credit possibility apart from stockholders: in close corporation. stock is available as collateral.	Depends on standing of individual partners; partnership interests usually can’t be pledged.

Management	Stockholders are not responsible: managers are employed.	By partners; they are responsible (except silent partners).
Flexibility	A corporation is limited to the powers (express and implied) in its charter from the state; may be subjected to judicial consideration.	Partners have leeway in their actions except to the extent limited by the Partnership agreement (occasionally by law).

CORPORATE SCANDALS

Although scandals in the business world are not a new phenomenon, the scope and fall-out from the Enron and Arthur Andersen debacles made the issue frontpage news for months. The scandals brought down two corporate giants and raised concerns in government agencies along with the business community. The well-publicized trials and large impact to their numerous employees and stockholders drew the attention of the nation. Researchers began studying the scandals to determine what could have caused established companies to commit fraudulent activities. In response to the scandals, the government created several new regulations. One major regulatory change that went into effect required CEOs and CFOs to sign off on financial statements for their company. The regulatory change placed responsibility of the accuracy of the statements on the CEO or CFO. While some regulations were seen as effective, some researchers argue that more regulations are not the solution to eliminating financial fraud.

The amount of corporate scandals occurring in the recent decades has prompted researchers to consider possible causes. The narcissist theory argues that executives with high levels of self-confidence and narcissism are more likely to commit fraud to maintain a positive image. Some researchers have found the individuals commit fraud simply because they have the opportunity. Narcissism is considered to be a possible reason for an individual to commit corporate fraud.

Financial frauds share the same three properties: “1)Inability to meet performance expectations, 2)Personal costs-pecuniary or nonpecuniary-of failing to meet expectations and 3)Being able to convince oneself that real performance will improve soon.”The manager’s overconfidence can eventually lead to the corporation getting caught up in a major scandal because the manager feels invincible.CEOs and CFOs often have little resistance when it comes to managing a corporation. Less resistance can lead to opportunities of financial fraud. Opportunity includes having the power and means to successfully report false information. Upper management generally answers to a Board of Directors (BOD) and stockholders. Although the BOD or stockholders can request to look at financial records at any time, as long as a company is earning money for its investors, most will not question the manager’s methods.

Not all corporations involved in financial fraud begin with the intent to deceive. Most scandals occur to maintain current earnings, not create them. Individuals and corporations generally labeled as “good” firms have been found to commit fraudulent activity.In theresearchers’ opinion, an individual that has never owned it,will not participate illegally to get it.

ROLE OF ETHICS IN CORPORATE

Ethical behavior and corporate social responsibility can bring significant benefits to a business. The idea that business enterprises have some responsibilities to society beyond that of making profits for shareholders has been around for centuries . This partly accounts for the reason why the concept of Corporate Social Responsibility (CSR) has continued to grow in importance and significance . One of the core beliefs is that business organizations have a social and ethical responsibility, as well as, the economic mission of creating value for shareholders or owners of businesses . Whereas, the economic responsibilities of a business are to produce goods and services that society needs and wants at a price that can perpetuate the continuing existence of the business, and also satisfy its obligations to investors; ethical responsibilities are those behaviors or activities expected of businesses by society and other stakeholders such as employees

Ethics are codes of values and principles that govern the action of a person, or a group of people regarding what is right versus what is wrong . Therefore, ethics set standards as to what is good or bad in organizational conduct and decision making . It deals with internal values that are a part of corporate culture and shapes decisions concerning social responsibility with respect to the external environment. The terms ethics and values are not interchangeable ). Whereas ethics is concerned with how a moral person should behave; values are the inner judgments that determine how a person actually behaves. Values concern ethics when they pertain to beliefs about what is right and wrong. The advantages of ethical behavior in business include the following

1) Build customer loyalty: A loyal customer base is one of the keys to long-range business success. If consumers or customers believe they have been treated unfairly, such as being overcharged, they will not be repeat customers. Also, a company’s reputation for ethical behavior can help it create a more positive image in the marketplace, which can bring in new customers through word-of-mouth referrals. Conversely, a reputation for unethical dealings hurts the company’s chances to obtain new customers. Dissatisfied customers can quickly disseminate information about their negative experiences with the company.

2) Retain good employees: Talented individuals at all levels of an organization want to be compensated fairly for work and dedication. Companies who are fair and open in their dealings with employees have a better chance of retaining the most talented people.

3) Positive work environment: Employees have a responsibility to be ethical. They must be honest about their capabilities and experience. Ethical employees are perceived as team players rather than as individuals. They develop positive relationships with coworkers. Their supervisors trust them with confidential information.

4) Avoid legal problems: It can be tempting for a company’s management to cut corners in pursuit of profit, such as not fully complying with environmental regulations or labour laws, ignoring worker safety hazards or using sub-standard materials in their products. The penalties if caught can be severe, including legal fees and fines or sanctions by governmental agencies. The resulting negative publicity can cause long-range damage to the company’s reputation that can even be more costly than the legal fees or fines.