Why do we need Companies?

Having written and talked about companies and their role in business for nearly two years, it seems time for us to pose the question - why do we need companies? In fact, what is a company?

A company is well described in some legal systems as a "legal person", as distinct from a "physical or natural person". In other words, a company owned by physical persons has a different identity from them. It can survive them and it holds assets and incurs liabilities separately from them as well. All of which makes life simpler and avoids any mixing of personal and business matters. In most countries therefore, a legal person or company/corporation cannot vote or hold public office or enjoy basic human rights, such as freedom of speech.

Of course, a company can be owned by the state, and the same applies - the activities of the company are separate from the wider role of the state. Interestingly, in the former Soviet Union, "enterprises" employed economists whose job it was to oversee the management of the assets of the organisation (which could of course be owned and be the subject of contracts) with the aim of achieving optimal economic results.

That, very briefly, explains the benefits of company status or "incorporation" in terms of clarity, but what about other criteria? One of these is efficiency, as mentioned in the preceding paragraph. A company needs to apply its resources in the best way possible and this is supported by the typical processes of a company. We'll take a look at these in a future post.


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