Question

Which form of business structure(s) can potentially face agency problems and which faces the greatest agency problems and explain why?  

1. sole proprietorship
2. general partnership
3. limited partnership
4. corporation

Answer 1

Agency cost refers to the cost arising out of the conflict of interest between the principles and agents in an organization.

The shareholders who are the owners of the firm are the principals and the managers are the agent. Shareholders want the managers to manage the company in a way that increases the shareholders’ value. While, the managers may wish to run the company in a way that increases their wealth and prestige even if it results in a decline in the market value of the company. And there lies the conflict between managers and shareholders.

So, agency cost arises in case of a corporation form of business structure.

Hence, the answer is option IV.

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