From a financial viewpoint the corporate form of conducting business presents one most significant feature, — the opportunity it af fords for dividing and recombining the inci dents of ownership in varying proportions. By "incidents of ownership" we mean man agement, income, and risk.
Personal owners can to a limited extent separate the incidents of ownership. A lease will put management entirely on one side, to gether with a part of income and a part of risk, and set the rest of income and risk on the other side. In the same manner a mortgage will effect the division, but place the manage ment entirely on the opposite side, with part of the income and part of the risk, and leave together the rest of income and risk.
If a man owns property and leases it, he hands management entirely to others. By mortgaging the property, he retains manage ment entirely to himself. Though a partner ship may further divide the ownership after the incidents have been split, it has no means to distribute the incidents themselves in any other manner or proportions. And a trustee holding formal title does not effect any other distribution.
The situation will become somewhat plainer by putting it more concretely. John Smith owns a farm worth $5000. He has all the incidents of ownership. Management and risk rest entirely with him; income goes en tirely to him. In the course of time he feels unable to carry all the burden of management. Maybe he would like to keep part of the management, exercise some control, and con tinue a fairly large share of the risk. By hir ing a man to run the farm, he could relinquish administration and retain control, but he would continue all the risk. He would suc ceed in dividing management into adminis tration and control, but he would not succeed in dividing risk at all. He is unwilling to con tinue all the risk unless he also continues the entire management, and this is just what he is seeking to avoid.
He can let the farm on shares; that is, the rental is not to be fixed, but to be a certain proportion of the income. But this would be to relinquish management entirely, yet retain the full nature of his original risk. He has, so
to speak, split risk perpendicularly but not horizontally. He can lease the farm for a fixed rental. Through this course he would part with all the management and decrease his risk and income. By selling the farm and taking a mortgage back, he would likewise part with the entire management and further decrease his risk and income. If, instead of a first, he takes a second mortgage, he will not diminish risk and income so much.
Personal ownership affords no course be tween, on the one hand, an absolute retention of all management, or at least control, in the case of a possible hiring of administration, with the retention of a large share of the risk and income, and, on the other hand, an abso lute parting from management, with a conse quent parting from a large share of income and risk. Further, the limited number of possible divisions afforded of the incidents of ownership forces the apportioning of income and risk along fairly rigid lines.
Through a peculiar personification of owner ship and enterprise, the corporation makes possible a parceling-out of the incidents of ownership in many combinations, an allot ment of management, risk, and income in varying proportions. The line of apportion ment no longer remains rigid, but becomes very flexible.
Actual practice has already carried far the division, sub-division, and rearrangement. The corporate form immediately divides, or marks the line of division of management, into administration and control. Sharehold ers possess control, but through directors delegate administration to officers. Varying rights given special classes of stock make a widely varying apportionment of income, con trol, and risk. Common shareholders accept a maximum of risk in expectation of a maxi mum of income. They may share the incident of control equally or in varying proportions with other classes of stock. Sharing con trol in varying proportion does not mean here through unequal divisions in the total amounts of common and other classes of stock, but that each share of one class represents an essentially different amount of control from each share of the other.