All this is of no importance if the partner is known to be the right kind of a man, who will shoulder his part of any burdens to be borne and who can be depended upon to co-operate when needed and to do nothing when not needed. If, however, there is any doubt as to the character or disposition of the prospective partner, this close alliance should be avoided.

A man must be a good judge of character to be able to select the right kind of man as partner. Two of the ablest men among the partners of the banking house of J. P. Morgan were selected by the international banker solely because they appealed to him as business men. Henry P. Davison, when vicepresident of a New York bank received an invitation to call on Mr. Morgan at his private house at three o'clock in the afternoon. He had met Mr. Morgan on two or three occasions only and did not consider himself anything more than a casual acquaintance. Promptly at three in the afternoon the young banker rang the bell of the financier's residence and a few minutes later the two business men were talking in the library. Morgan wasted no time in preliminaries: "Are you ready to become my partner on January 1?" he asked. The query nearly took Davison's breath away. He parried in reply: "Mr. Morgan, have you ever fallen from an eighteenstory building?" It was the financier's turn to be bewildered. "No," he replied, "why do you ask?" "Well, neither have I. But I thought if you had you would understand how I feel.” Then Morgan laughed and a few minutes later the matter was settled.

The Corporation

The partnership is the old, familiar system of business organization, easily formed, as easily dissolved, informal, uncertain in action, and frequently unsafe. Enterprises of large size are but seldom financed under the partnership form. Its use for enterprises of any size is of doubtful wisdom.

The corporation, on the other hand, is an efficient and widely used system of business organization. It is created by a charter, granted by the state upon application of the interested parties. The corporation so created is for all practical purposes an individual, carrying on business, making contracts and suing or being sued in its own name. It is entirely separate and distinct from its members who may die or withdraw without affecting the corporation. It is subject to the general laws of the land and the special laws of the state just as an individual.

The advantages of the corporate system are several. The first and most obvious is the freedom it offers from the liability which characterizes the partnership. A partner is liable for all debts of the partnership. In a corporation a stockholder is not ordinarily liable for any of its debts. A purchaser may acquire a single share or a hundred shares of stock in a corporation and-if the stock is full-paid-go on about his business with the full assurance that he cannot lose more in that enterprise than the amount of money paid for his share. No matter what happens to the corporation he cannot be involved beyond the loss of his investment.

The second great advantage of the corporation is the convenience and flexibility of its arrangements. The smaller investor may be provided for equally with the man putting in hundreds of thousands. Each has his proportionate interest and his proportionate rights. Also, under the corporate system almost any desired business conditions may be effectively provided for and preserved. Its adaptability in this direction is remarkable. Enterprises of the present day are carried on almost uniformly under the corporate system.

The one material objection urged against the corporate system, as a means of conducting enterprises, is the absolute control which is exercised by the majority stockholders. It must be admitted that this objection to the corporation does exist and that it may be a serious one unless expressly provided

against. On the other hand, the same objection exists to any form of business organization. The majority must and always will rule. Their absolute power may, however, be so modified in the corporation by provisions for minority representation and by charter and by-law limitations on the power of the majority, that its objectionable features are largely or wholly removed. The corporation then becomes the safest, the most effective and the most generally desirable form of business organization known to the industrial world.

Adequacy of Capital

The necessity for capital in the development of a new business will not be questioned. A sharp difference of opinion is, however, likely to exist as to the amount required. Especially with young or inexperienced men the almost invariable tendency in calculating the necessary expenditures and the probable receipts of a new enterprise is to seriously minimize the one and to greatly overestimate the other.

It is a simple matter to take pencil and pad, sit down, figure out the necessary expenses of the new undertaking, add a percentage for incidentals and, to be fair, a further allowance for overhead, and deem the matter settled. The experienced business man, however, knows that at every stage and step of development there are delays, changes of original plans, unexpected requirements, failures of expected revenue, and along with it all, endless incidental but unavoidable expenditures that bring the sum total up far above anything that would at first sight seem possible. Because of this inevitable and unconquerable tendency of expenses to swell far beyond the expected limits the inexperienced man should either consult some friendly expert familiar with the particular line in which he proposes to embark, or otherwise allow a liberal percentage for incidentals and operating margin, and beyond this a considerable amount for the unexpected.

This is the more important because of the very great difficulty of raising further money for enterprises when the original funds are exhausted before the enterprise reaches the condition of self-support.

When an enterprise is first presented, if the proposition and conditions are favorable, it is nearly always possible to raise the amount thought necessary for its purposes, and it is a measure of wise precaution to secure a treasury reserve of cash at this time sufficient to carry the company through to success. If this is not done or the funds provided prove to be insufficient and are exhausted before the enterprise has reached the point of self-support, the condition is peculiarly unfortunate. The failure to pull through is hard to explain, the enterprise is discredited, and the whole thing is looked upon as a "lame duck" if not a complete failure.

Under these conditions, to secure more money on any ordinary basis is almost impossible, and if it is accomplished, the "carrying" individual or syndicate usually demands, and perforce receives, payment out of all proportion to the amount of the investment.

Such a situation should as stated be avoided by a sufficient provision at the time the enterprise is launched to carry it safely through to the point to be attained. If the amount required for this cannot be obtained at the time, the enterprise should either be held back until the required sum can be secured, or the development plans be so modified that the amount in hand will suffice. To do otherwise is to invite disaster.

On the other hand, the position of the enterprise which has reached a point of self-support and moderate returns, but which must raise more capital before further progress can be made, while not exactly favorable, is still far superior to that of the stranded enterprise. It is beyond the dead line. It has life and vitality. It is neither a suppliant nor a forlorn hope. The risks of investment in it are minimized and there

is a certain degree of attractiveness about it that makes the raising of additional capital very much easier. The situation is not an uncommon one and the ordinary methods of securing capital may, as a rule, be used with success.

EXERCISES

The financing of an enterprise involves numerous problems, into the details of which it is interesting for a prospective manager and proprietor to penetrate. The study of certain of the books listed in Chapter XXIX will supplement excellently the necessarily brief discussion contained in this work and enable the young business man to handle the financial problems of his business with a surer hand. The problems themselves center in such questions as:

Amount of Capital Needed

How much capital is needed to start the business?
How much is needed for working capital?

Borrowing

What sources of credit have I?

How much capital can be secured from these sources?
By what means can my borrowing capacity be increased?

Partnership

What advantages in partnership? What disadvantages?
Could the capital required be secured more effectively by
taking in partners?

Incorporation

What advantages in the corporate form of organization?
What disadvantages?

To whom could I sell stock in this enterprise?

Building Up the Business

Should I build up the business myself clearly-learning as

I go?

Had I better hire others to manage it for me?

Can I afford to give full time to it?

Is it better to consider it a side-line?