Tuesday, October 29, 2013

Alternative Business Forms

The current issue of the Economist has two interesting pieces (here and here) detailing forms of business that are acquiring prominence in the US markets and posing a challenge to the dominance of corporations (or companies) as the main form of business vehicle. Referring to this phenomenon as “distorporation”, it primarily alludes to the master limited partnership (MLP).

The details are described as follows:

The “master limited partnership” (MLP) combines the limited liability of a corporation, the tax advantages of a partnership and the governance of a private firm. MLPs do not pay corporate taxes so long as profits are passed on to investors each year. They also pay less attention to shareholder rights. A tidal wave of capital is washing towards these and other, similar “pass-through” structures ... Together, they represent a mere 9% of the number of listed companies in America, but in 2012 they took in 28% of the equity raised on public markets and paid one-third of Wall Street fees.

There are two key drivers behind the emergence of these types of vehicles. First, they minimize the tax burden. Second, they do not fall within the purview of details rules regarding corporate law and governance. While this facilitates the establishment of businesses more efficiently, there could be issues regarding loss of revenue and limited protection to minority investors.

The Economist adopts the position that such distortions in business vehicles can be avoided if taxes are streamlined and regulatory aspects of governance are loosened. However, it is not clear if the regulatory response would be on similar lines. In any event, such occurrences seem to have triggered a race to the bottom when it comes to competition between different business forms as far as governance and minority protection are concerned.

1 comment:

vswami said...

Tentative Offhand Reaction:
Anyone who cares to, to begin with, have a quick look through the cited two articles, also the insightful comments thereat of the enlightened readers’ posted, cannot fail to instantly decipher that the subject write-up has simply touched the tip of the iceberg. For knowing and fully understanding the true implications of the novel idea of ‘distorporation’ and its hidden/not so-obvious impact on the nation’s economy – in a way, the anti-social /-national effect or consequence of the concept in more than one respect,- recommend a mindful reading of those articles.
For a quick synopsis, suggest having a glimpse of the extracts as put out, simply for highlighting, in the personal Blog @