This one is a whopper; a company is a person. Nope, this is not a line out of a political manifesto to be ignored completely; a company is a legal person separate from its individual members and can be sued and can sue on its own behalf, whatever that means. In substance a company can own properties, borrow money, do business, get into relationships through something referred as mergers and acquisitions, have offshoots in the form of subsidiaries, do things which are fishy, generate profits by overpricing, enjoy preferential rights and a lot more. Except the best part is that a company cannot be sent to jail; and it is for this special privilege that the company was conceived.
The primary argument in favour of having companies is that they promote entrepreneurship. And how do they do that? Simply by having a limited liability, which means that the liability of the shareholders is limited to the amount of money they have invested in the company. Contrast this with a real person; in case his business loses money the owner is personally responsible to pay for the loss, on the other hand if a company incurs a loss, it’s a business loss which under all likelihood is borne by the taxpayers.
The argument behind a corporate entity has merit. The only way to encourage investors to undertake uncertain fraught with risk businesses is by allowing them to operate with other people’s money without recourse. And how does the company get access to other people’s money? Mostly by taking loans from banks, which in substance are the deposits of the masses, and directly in the form of equity from the smaller shareholders. And because companies indulge in enterprising fraught with risk businesses they deserve to get loans at cheaper rates. Dear readers, this should have explained one of the biggest mysteries of the business world; the reason why the general public, the common man, whose very deposit banks lend out, get home financing at interest rates which are substantially higher than rates at which companies get loans. Another reason could be that banks are companies too!
Special privileges are another defining quality associated with companies. Since business is risk taking, a company should enjoy certain privileges and monopoly rights top that list. The precursor of the modern day company was the famous, well in these parts at least, East India Company. The company was established in 1600 and had exclusive rights to trade in certain defined areas; although it did more than trade and ended up conquering the Subcontinent. Special privileges continue to be vested in companies even today for certain businesses such as banking and financial sector, power, currency and a lot more. And for the record, companies continue to conquer all; they even influence elections.
It would be natural to assume that with these kinds of privileges, the companies should be paying a heavy cost for their existence, at least in the form, of higher taxations. Nope, wrong again. Since the companies do a great favour to society they are given special discounts in their income taxes as well. The tax rate is lower for companies when compared with salaried individuals even, albeit in the higher bracket. And there is a reason for that, without companies, as the standard argument goes, there would be no salaried individual and hence the latter should pay for the privilege of being employed by companies. Articulated this way, it even makes sense for employees to pay more taxes than the employer; not that salaried individuals can do anything about reducing their tax liabilities.
In brief a company is a special legal invisible person, who can borrow other people’s money cheaply, enjoy special privileges in the form of licences to do business which are beyond the reach of mere mortals, and pays lesser taxes. With this kind of benefits the natural progression of an inquisitive mind is to ask, who can set up a company? Well, in essence, anyone can, but there are companies and then there are COMPANIES. The company discussed here is the sole domain of the rich; all other companies are nothing more than sheep in wolf’s clothing. It is the rich’s company which provides protection from creditors when business loses money and that too cheap money, or special privileges and lower tax rates. All other companies suffer commoner’s law. And to clarify, a company cannot be setup to take advantages of a cheaper home mortgage.
An additional advantage of having a company is that it can be listed on the stock exchange. The primary objective, well at least the stated one, of the stock exchange is to provide an opportunity for a company to raise capital and allow the common man to participate in the benefits enjoyed by companies through its many privileges. The discussion whether the stock exchange is performing this role or is a casino, as categorised by Keynes, is discussed in the relevant chapter of the Simpleton’s Handbook to be released at a later date.
A layman, by now, should be wondering what service a company performs to enjoy such a VVIP status. Well as the theory goes, companies are the lifeline of the economy. They create employment and enhance the quality of life of the common man by providing goods and services at competitive prices. In addition, earn foreign currency for the country and generally are responsible for the development of a country.
The cynics should stop their snickering. Admittedly, in Pakistan, the economy has been struggling, employment has missed the mark, goods and services have never been cheap, companies have been defaulting on their loans, and whatnot; but all this cannot be blamed on the corporate sector. The blame lies in the fact that democracy has never flourished in Pakistan. And what has democracy got to do with companies? No idea, but since there is a popular scapegoat, let’s go with it!
The gurus will in the end give another argument for companies not paying back for all the privileges that they enjoy; Rome was not built in a day. Pakistan is only six decades old, give or take a few more decades under democracy things will look up. Well dear readers, let keep waiting for the company to finally do the job. And no, a real person cannot become a company!
Bukhtiyar Kazmi, "Simpleton’s handbook on companies," Business recorder. 2014-10-20.Keywords: Economics , Economic issues , Economic system , Economic growth , Political issues , Political manifesto , Tax policy , Tax reform , Tax-GDP , Business enterprise , VVIP status