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What is a company anyway?

150starofindiaThere is a lot of talk about forming companies, and almost as much about how long companies last. Most new companies fail within the first year. Those that survive the first year last an average of twelve years. The half-life of Fortune 500 companies is 15 years. Companies that survive ten years and become very big, only last an average of 30-40 years, but there are companies that have existed for hundreds of years. And so on. What is true, and what is important?

Consider the meaning of the word "company," as it was meant originally. A ship's company, a company of soldiers, the company you keep - they are all groups of people with a shared purpose and values. And of course, the purpose could be trade or industry. A group of people co-operating together for the purpose of trade. That's your company, right?

300muscovyOne of the earliest joint-stock companies was the Muscovy Company, formed in England in 1555 and trading with Russia until the revolution in 1917. By earliest, I mean simply that it's existence was recognised in law, and formalised on paper. Partnerships have existed for as long as we have, but documented legal entities are a different matter.

As a documented legal entity, lasting hundreds of years, the Muscovy Company had an existence of it's own which exceeded that of it's founders. The company survived, while the founders of the company died of old age. If you think about this, the company is more important than the individuals in it. Once it has a life of it's own, it starts to serve it's own needs, it becomes a super-organism that uses people for its own needs. Individuals can devote their entire lives to serving the company, it can reward them or discard them when they cease being useful. The choice is made by the logic of business, not by loyalty to the group. The profits go to the owners, not the people who make up the company.

The next stage in the life of a company is often the separation of ownership and control. Companies are run by professional managers who have incentives to make profits. Very often, the incentives are designed by other professional managers and may not be in the best interests of the the company, or the shareholders. This is called the agency problem, and it's behind the banking crisis of 2008. Banks exist to enable efficient use of capital, but bankers exist to make bonuses even if they harm the banks and require bailouts.

Of course, a successful company acts to protect itself against these individuals. Individuals can be sacrificed for the good of the company, whether they be employees who don't make their quota for the month, or bad managers who set unreasonable quotas for their own selfish reasons. A successful company is one that sacrifices individuals for it's own good. Remember that.

In the modern world, there is another kind of company. It's not a collection of people, and it's not a super-organism that uses people. It's just a legal convenience created and used by people, and sacrificed as required. You can form a legal 'company' in some countries today at almost no cost, with no capital requirement, and only one shareholder (who can also be a company), for any purpose you wish. If you want to move money to the most tax-efficient jurisdiction, avoid laws which interfere with your plans, sponsor a visa, or simply seperate Project A from Project B so that neither is affected if the other fails, modern company law makes it easy.

This kind of company is the opposite of a super-organism, because it serves individuals and can be used or sacrificed as required. This kind of company does not need to be 'successful' because the persons controlling it are simply using it as a vehicle for their real purpose. Statistics about companies include these paper entities, but not the informal groups that create them, so they're not a useful guide to how many real businesses start or fail each year.

If you're running a business, chances are you're not doing it alone. You have partners and collaborators, and you probably use a variety of legal entities together to help your business function in the most efficient and trouble-free way. But your real company, the group of people working together in the old-fashioned way to achieve a common goal, is still bound by the same principles as any other organisation: you are a part of a super-organism that will use you and discard you when you stop being useful.

  •  Is your real company organised to help you achieve your goals?
  •  Or is the company more important than you?
  •  What about the other people in your company? Are you more important than them?
  •  Will the company survive if one or all of you dies suddenly tonight?
  •  If someone else runs the company, how do you know they will take care of the company, and you, rather than themselves?