What makes corporations different from individual-owned businesses?
Introduction
Many factors differentiate corporations from individual-owned business, such as control, liability, taxation, and administration. However, the purpose of the paper is not to look at their different characteristics, but it focuses on finding the nature of corporations that makes it different from individual-owned businesses. The research paper finds that what makes corporations different from individual-owned businesses is their social responsibility and corporate governance. It is essential to understand that all businesses, large or small, have a social responsibility, but corporations are the main target since they are created by law, and therefore they are expected to make profit and benefit the society. Therefore, their obligation to society is not the same as the obligation of the individual-owned business. In addition to its social responsibility that promotes social welfare and organization interests, corporations differ from the individual-owned business due to their internal and external governance. In other words, corporations have corporate governance that directs and controls the organization. Therefore, corporate social responsibility and corporate governance practices are the fundamental ways that make corporations different from individual-owned business. These different ways are not only for the interest of the corporations such as profit-seeking, but they also bring efficiency economy through creating socially beneficial endeavors.
Internal and external corporate governance
First, it is important to understand that corporations in both developed and developing countries experience corporate scandals such as financial crisis (Filatotchev & Chizu, 591). Such crises are brought by lack of professional integrity and distorted systems. To manage the crises, corporations have improved their corporate governance to strengthen the relationship with entities and corporate boards. Unlike the individual-owned business, corporations have internal and external governance mechanisms. Note that the individual-owned business is just a business that has no legal expense and its managerial decisions are not complicated (Lynott, 28). The business owner enjoys many benefits such as little costs for set up, enjoys all the profits, enjoys maximum privacy, easy to dissolve, lack double taxation, among other benefits. This means that the business does not require governance or regulatory agencies (Lynott, 28). On the other hand, corporations encounter internal problems such as managerial opportunism, misaligned objectives, and distorted incentives. To address these problems, corporations use internal governance where the board of directors controls the organization by implementing a control mechanism. For example, the board of directors have the power to dismiss a bad CEO, monitor organization performance, among other activities to ensure that operations meet the shareholders' interest (Filatotchev & Chizu, 592). Note that corporations have separation of ownership. This can lead to inefficiencies and for this reason, the agency theory states that the boards of directors evaluate managerial performance and monitors managers, and more importantly provides transparency to ensure that the operations align with the shareholders' interest. Unlike the individual-owned businesses, corporations have external corporate governance. Note that corporations have contractual relationships with other entities such as network patterns, customers, suppliers, among others. The role of external corporate governance is to solve the problems that arise from this relationship (Filatotchev & Chizu, 601). For example, during the process of internationalization, firms encounter problems that arise from control in distribution and allocation of production, exploitation of resources, and other substantial risks. The eternal governance controls the behavioral uncertainties and other microeconomic factors and risks.
Corporate Social Responsibility
Individual-owned businesses have less complicated managerial decisions, and they can be considered as a profit-seeking business. However, corporations have other roles that surpass that of seeking profit. In other words, they must maximize social welfare and at the same time, meet the organization interest (Asemah, 45). Therefore, they have a self-regulating mechanism whose role is to ensure that the organization comply with ethical standards and law. Unlike the individual-owned businesses, corporates focus not only on meeting the organizational goals but also to improve the social welfare through activities such as providing high-quality products, increase the marketability, provide reliable products, and transform the society. Even though all forms of business must comply with business ethics, corporations should be in the front line to behave ethically to improve the local community, the life of the workforce, and more importantly, bring economic development (Asemah, 46). A point to note is that corporations do not only focus on making profits, but they consider other factors such as social factors, economic factors, , and environmental factors. In making decisions, they must add value to these sectors to meet social interest. Note that the act of being involved in the society adds benefits in that corporations gain competitive advantages and enhance their financial performances.
Conclusion
Corporate social responsibility and corporate governance are important aspects that differentiate corporations from the individual-owned business. Note that in individual-owned business, the owner only focuses on making profits. He or she is interested in business activities and less likely to engage in socially responsible practices. Even though the owner may build a strong relationship with the community, the major role of the relationship is to increase sales and other practical reasons but not emotional reasons. However, corporations do not perceive profit as the only priority, but they consider their responsibility to society. This includes maintaining healthy lifestyles in the organizations, protect the environment through activities such as the use of energy-efficient properties, comply with the law, among other roles. In general, corporations focus on making a difference in society and in turn, the organization improves performance and gain competitive advantage. Another thing is that corporations have internal and external governance. This means that they have complex structures that require internal and external control. They have internal mechanisms where the board of directors provides internal control to ensure better corporate performance. They also have an external mechanism where the organization addresses problems that arise from the capital market, labor market, investor activities, and more.
Work cited
Asemah, Ezekiel S., Ruth A. Okpanachi, and Leo ON Edegoh. "Business advantages of
corporate social responsibility practice: A critical review." New Media and Mass
Communication 18.3 (2013): 45-52.
Filatotchev, Igor, and Chizu Nakajima. "Internal and external corporate governance: An interface
between an organization and its environment." British Journal of Management 21.3
(2010): 591-606.
Lynott, Bill. “Sole Proprietorship or CORPORATION?” Home-Based Travel Agent, vol. 3, no. 4, Apr. 2008, pp. 28–31. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=hjh&AN=31656049&site=ehost-live.
