The Articles of Incorporation (AoI) as a Necessity for a Corporation - Essay Example

of College [MFT450] Term paper Q The Articles of Incorporation (AoI) is necessary for a corporation. It gives a corporation a legal backing. The content of the document outlines those features that distinguish corporations from other forms of organizations. AoIs differ from one country to another and from one region to another but they typically, carry the legally recognized name of the corporation, list the incorporators, outlines structure of the organization of the corporation, and spells out purposes of the corporation as well circumstantial issues of insolvency, assets and liabilities, and dissolution among others. The AoI essentially form the basis from which corporations build their identities. The AoI usually starts with the section on the name and (physical, mailing and forms of) address of the corporation. This section if followed by the section on the purpose of the corporation, which must be among legal and legitimate areas of activities. This section, together with the first section, distinguishes the type or category of the corporation; for example, profit or non-for-profit organizations. Because, the AoI is the legal basis for relationship among incorporators, there is a section that spells out the limitations to the powers and privileges of those that manage the corporation as it regards the, for instance, earnings of the corporation. It further distinguished what is personal and what is corporate in terms of assets and liabilities. In addition the AoI states the management structure of the corporation including board members. A section usually outlines this structure, membership and roles. As reference document, the AoI also makes provisions for managing corporation’s assets and liabilities in case of dissolution. Finally, the AoI carries the signature of the incorporators or the leally recognized representatives (http://managementhelp.org/legal/articles.htm). Because AoI is a legal document, it must be signed by the incorporators or the legally recognized representatives. It is usually prepared by legal practitioners and approved by government agencies. Once it is signed and sealed, it becomes the reference document for the operation of the corporation. Changes, such as transformation of a private corporation owned by few individuals to public corporation owned by large number of shareholders and usually quoted in the stock market, must be reflect in the respective sections and clauses. Q.2.a Agency theory seeks to explain the relationship between a principal(s), who hires an agent(s) for services and delegate the power of decision-making to the agent(s). It also seeks to examine variations in behaviours in the principal-agent relations. These relations could be harmonious or frictional. However, agency theory specifically seeks to explain agency conflicts that arise as a result of conflict of interests between the principals and the agents such as the conflict that occurs commonly between shareholders and managers. The theory assumes that different parties with common goals in a principal-agent relation will have different motivations, which can manifest differently. It therefore states that “there will always be partial goal conflict among parties, efficiency is inseparable from effectiveness, and information will always be somewhat asymmetrical between principal and agent” (http://www.wisegeek.com/what-is-an-agency-theory.htm ). Such partial goals of the agent may be detrimental to the overall goal of maximization of shareholders wealth. Q.2.b In private corporations ownership and power of decision-making usually coincide. Therefore there is virtually no basis for applying the agency theory. However, the setting in public corporations fits well into the conflict situation agency theory seeks to examine. The shareholders are the principals while the management team are the agents. The interests of the shareholders are managed by the managers (usually constituting the Board of Directors), who may themselves have shares in the company. Agency-type conflicts are likely to occur in this type of corporation. The directors may take decisions that may only enrich their pockets as against decisions that will further the interest of the shareholders, maximization of wealth. Q.3.a Businesses are established mainly for profits. But profit maximization should not by itself be the ultimate goal of businesses, where there is a functional financial management system. This is because of a number of reasons. First, the craving for maximizing profit may blind business managers to making decisions without recourse to risks. A business may appear to be promising given the profit margins it offers. An increment of, for example, 25% in the earnings per share of company may be accompanied or followed by a risk that will cost the company 10% reduction in the value of shares in two years. Decisions that will achieve this goal may be tempting. However, a 10% increase in earnings per share that guarantees just 0.25% decrease in the value of shares is in the long run better because it minimizes unavoidable risks involved in the business. Secondly, related to the above, limiting goals of businesses to maximization of profit may lead business managers to be short-sighted. In a bid to make immediate profits, they may not weigh other options that will bring long term but higher profit. Their craving for quick-profit may push them make decisions without factoring in the timing of profits. Thirdly, setting goals that seek to achieve profit maximization increases the risk of neglecting other key variables such as inflation and interest rates (________, 12). Finally, businesses managed with the main goal of profit maximization may increase the possibility of sharp practices of business managers. Maximizing profit as against maximizing shareholder wealth can more easily be achieved by managers because they can more easily fix the figures in company’s financial records by increasing the earnings on shares than stage-managing the share price of the company in the stock market. Q.3.b The goal of maximizing shareholder wealth transforms profit from being an end in itself to a means for achieving an end; maximizing the wealth of the shareholders of a company. Setting and achieving this goal requires extensive knowledge of the business environment including the stock market and other trends of other major economic indicators such as inflation and interest rates; ability for long-term forecasting; and sensitivity to shareholders/investors’ expectations. In therefore requires a stable management that will not only develop but implement long-term strategic business plans. Conclusion For businesses that seek to prosper especially to create and sustain a niche in a globalizing economy, AoI is sin quo non. AoI is the passport for national and international business. It guarantees smooth transition from one form of ownership of business to another, and ultimately in case of unplanned and unwanted collapse of business. It, as well, protects diversification of businesses which is usually characterized by superior risks. Incorporation of businesses does not guarantee conflicts, which may mar growth and development. With the help of the agency theory, businesses can be studied and potential sources and types of conflicts can understood and managed. Harmonious relationship among stakeholders in businesses should lead to the setting and achieving attainable goals. These goals should not ultimately aim to maximize profit. It should rather harness resources to achieve the goal of maximizing shareholders wealth. Pursuing this goal reduces risks, encourages long-term planning and leads to sustained growth and development in businesses. References Managementhelp.org. “A Sample Articles of Incorporation”. Web. April 23, 2010. http://managementhelp.org/legal/articles.htm Wisegeek.com. “Agency Theory”. Web. April 23, 2010. http://www.wisegeek.com/what-is-an-agency-theory.htm Read More