ECON 2720 Study Guide - Final Guide: Limited Liability Partnership, General Partnership, Bookkeeping
26 Jun 2016
School
Department
Course
Professor
Review Sheet 3
==================================================================
(1) What do we mean by the medieval Italian Commenda form of business organization? How
does it fit into the spectrum between the General Partnership and the Corporation? What
circumstances prompted its emergence?
A medieval Commenda was an early form of limited liability partnership emerging in the
tenth century and eleventh century. Such partnerships usually lasted the duration of specific
voyage, possibly to multiple ports before returning. The Italian port cities such as Genoa,
Venice, and Pisa used two types of Commenda contracts, unilateral and bilateral, in order to
bring together an active manager and passive investors for merchant voyages. Upon return to
port the merchant would sell off the ship's cargo, the profit would be divided according to the
type of Commenda Contract made. In the unilateral agreement the merchant provided zero
capital and thus took on no liability should the trip fail, for management work however the
merchant received one quarter of the profit. On the other hand in the bilateral agreement the
merchant provided a third of the capital, as well as a third of the liability, and for his work and
financial risk the merchant would get one half of the profits. The Commenda business form
would lie closer to a corporation on the spectrum as it was a predecessor for the modern
corporation in that it allowed passive investors the ability to diversify their saving with little
business experience by simply providing capital, much like the purchase of a stock. The
merchant also acted as the professional management of the firm in that they had incentive in
the form of profit and acted on behalf of the passive investors.
==================================================================
(2) Why do we say that the emergence of the Commenda form opened the possibility of
investing in business to a wider range of people (democratization of investment)? What made
this possible?
The relationship between investor and manager that was unique to the Commenda
form is what allowed for a great number of people to invest in many different profitable
opportunities. Having an active manager, or the ship's captain, working with capital
provided by passive investors doesn’t require the passive partner to be knowledgeable on
the subject of business. This allowed for the passive investor to be anyone who could
provide capital including the nobility, who used this to do business and investing discretely
from the public eye. What made these arrangements possible were laws in places like Italy
that facilitated limited liability partnerships; this is opposed to England where commercial
law distrusted limited liability.
==================================================================
(3) Explain what we mean when we say that the Commenda was typically established on a
venture basis.
Trading ventures required travelling across Europe, attending medieval fairs, and
usually lasted several months. Initially, travelling partners and financing partners
established a commenda that was legally binding for each festival season - a venture
basis. Eventually they entered into multi-year agreements.
→ meaning they could do the accounting
==================================================================
(4) What were the Medieval Supercompanies? Were they partnerships or corporations?
Medieval Supercompanies:
• Took root in Florence and were the first multi-national companies
• They were the largest employers in Europe
find more resources at oneclass.com
find more resources at oneclass.com
• They were quasi-permanent multiple partnerships (NOT CORPORATIONS),
which did not dissolve upon the death or removal of one of the partners
• Partnership basis
• Relied heavily on renting assets.
o They rented ships and warehouse space
o Allowed the companies to have very precise accounting since they were
able to assign costs to the exact ventures that the revenues came from
o Each trading voyage was a separate venture
Why did these supercompanies fail?
1. They had a tendency of lending large sums of money to Monarchs
a. Monarchs essentially did as they pleased, and if these loans could not be
paid of (in most cases they were not), they simply defaulted. This meant
that the loans were essentially sunken costs for the supercompanies.
2. They focused too heavily on wheat and wool companies rather than diversifying
Medieval supercompanies were businesses that began as commodity traders, buying
and selling all across Europe, eventually becoming merchant bankers. The
supercompanies, that often bore the name of the family that was in control (ex. Bardi
and Peruzzi), were essentially multinationals as they had offices all over Europe, but
they were still under the partnership structure.
==================================================================
(5) What do we mean when we say that the Supercompanies did their bookkeeping on a
venture basis? Why did they do this?
Long horizon as partnerships, but they organized each separate business voyage as a
different venture. All the accounting from each venture was kept separate from all other
ventures. This was possible for the Supercompanies as they did not own any ships or
warehouses (rented everything).
• This meant that they could segregate costs and revenues of each separate
venture; no joint or fixed costs.
While they were a long time business, they organized business on an individual
venture/trading voyage basis. They owned little capital, trading grain and wool all over
Europe, which requires warehousing, transporting, and did so by renting the required
resources rather than owning physical capital. Bookkeeping advantage - each cost
incurred on an individual venture could be attributed to that ventures revenue.
==================================================================
(6) How did the Supercompanies handle the Principal/Agent problem? Discuss the case of
managers who were family members and the case of managers who were employees.
The Supercompanies had offices all across Europe, with family members in charge of the
offices situated in more important cities, and employees managing the offices in lesser cities.
The principal/agent problem with family members in the business was resolved through the
threat of disownment. This kept family members relatively in line because they knew they would
lose their reputability if they were disowned. Managers who were not part of the family were
paid on a seniority basis, with increases in salary proportionate to the amount of time they had
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
A medieval commenda was an early form of limited liability partnership emerging in the tenth century and eleventh century. Such partnerships usually lasted the duration of specific voyage, possibly to multiple ports before returning. Venice, and pisa used two types of commenda contracts, unilateral and bilateral, in order to bring together an active manager and passive investors for merchant voyages. Upon return to port the merchant would sell off the ship"s cargo, the profit would be divided according to the type of commenda contract made. In the unilateral agreement the merchant provided zero capital and thus took on no liability should the trip fail, for management work however the merchant received one quarter of the profit. The relationship between investor and manager that was unique to the commenda form is what allowed for a great number of people to invest in many different profitable opportunities.
