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What Is an Uncorporation?

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  • Written By: Terry Masters
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 20 August 2017
  • Copyright Protected:
    2003-2017
    Conjecture Corporation
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Uncorporation is a category of business entities that have features of both a partnership and a corporation. It is an alternative to the traditional public corporation format that removes the fiduciary duty to maximize profits for shareholders and allows management to adopt business goals and objectives that are not necessarily concerned with making the most money. An uncorporation retains the limited liability features for owners that a corporation enjoys while adopting the more flexible management structure of a partnership.

A corporation has hundreds of years of history stemming from its development and first uses in European countries in the 13th century. The legal framework that evolved around the modern corporation and its authority to raise capital from the public established a fiduciary duty on the part of officers and directors to maximize profits for shareholder-owners who were invested in the corporation but had no real way to influence the day-to-day activities. This profit-motive effectively restricts the options of major shareholders and management who may prefer to sublimate profits in favor of workers rights, social responsibility, or any other objective that does not necessarily focus on the primacy of profit.

For example, corporations typically engage in activities designed to demonstrate to consumers that they are responsible corporate citizens. These activities fall under the corporate social responsibility category and are justified to the extent that they generate goodwill that affects the corporation's bottom line. Goodwill is considered an intangible asset that is quantified by accountants in relation to its impact on business valuation. If a corporation wants to implement a policy that goes beyond what can be justified as necessary for goodwill, an accountant can legitimately raise concerns regarding the waste of corporate assets that should be directed towards maximizing the return on shareholder investments.

In the 1980s, jurisdictions began to develop alternative business formats that gave owners the main benefits of incorporation without the narrow limitations associated with raising money from unrelated investors under corporate regulations. Legislatures married these incorporation benefits with the structural flexibility of the partnership, which allows almost every operational issue to be negotiated by the owners under a management contract. The new business entity types include the limited liability company, limited liability partnership, limited liability limited partnership, and business trust. Using one of these entities for a large business concern instead of the corporation is analyzed in terms of the rising popularity of uncorporation.

The uncorporation is characterized by its private ownership structure and managerial flexibility. Examples of types of businesses that are viewed in this context are real estate investment trusts (REITs), hedge funds, and venture capital funds. Uncorporation does not preclude raising money from the public, but public capitalization is structured under partnership rules to avoid the necessity of operating to maximize shareholder's rights. Examples include publicly-traded partnerships and REITs.

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