IV. INSTITUTIONAL UNITS AND SECTORS
B. Institutional units in the form of legal or social entities
| 4.22. | This section is concerned with three main categories of legal or social entities that constitute institutional units, namely corporations, quasi-corporations and NPIs. Units of central, state or local government are considered in a separate section below. |
1. Corporations
| 4.23. | Corporations may be described by different names: corporations, incorporated enterprises, public limited companies, public corporations, private companies, joint-stock companies, limited liability companies, limited liability partnerships, and so on. "Corporation" is the preferred term used in the System for all these kinds of entities. A typical corporation may be described as:
a legal entity, created for the purpose of producing goods or services for the market, that may be a source of profit or other financial gain to its owner(s); it is collectively owned by shareholders who have the authority to appoint directors responsible for its general management. |
| 4.24. | The laws governing the creation, management and operations of corporations may vary from country to country so that it is not feasible to provide a precise, legal definition of a corporation that would be universally valid. It is possible, however, to indicate in more detail the typical features of corporations that are most relevant from the point of view of the System. They may be summarized as follows:
(a) A corporation is an entity created by process of law whose existence is recognized independently of the other institutional units - i.e., households, corporations or government units - which may own shares in its equity. The existence, name and address of a corporation are usually recorded in a special register kept for this purpose. A corporation may normally be expected to have a centre of economic interest - i.e. to be resident - in the country in which it is created and registered. When it also has one or more branches engaged in significant amounts of production over long periods of time in other countries, such branches are treated as quasi-corporations that are separate institutional units resident in the countries in which they are located;
(b) A corporation is created for the purpose of producing goods or services for sale on the market at prices which are economically significant. Prices are said to be economically significant when they have a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy. Any operating surplus accruing from a corporation's productive activities or holding gains or property income accruing on its assets, belong to the shareholders, but the amount of profits or income actually distributed to shareholders as dividends in any single accounting period depends on the directors of the corporation. Undistributed profits are often described as retained earnings;
(c) Ownership of a corporation is vested in the shareholders collectively. Profits are usually distributed to shareholders in proportion to the value, or amounts, of the shares or other capital participations which they own. There may be different kinds of shares in the same corporation carrying different entitlements. In the event of a corporation being wound up, or liquidated, the shareholders are similarly entitled to a share in the net worth of the corporation remaining after all assets have been sold and all liabilities paid. If a corporation is declared bankrupt because its liabilities exceed the value of its assets, the shareholders are not liable to repay the excess liabilities. The shareholders are different institutional units from the corporation itself and their liability is limited to the amounts of capital they have subscribed in shares;
(d) A corporation is fully responsible and accountable at law for its own actions, obligations and contracts, this being an essential attribute of an institutional unit in the System. A corporation is liable to pay taxes on its productive activities, income or assets;
(e) Control of a corporation is ultimately exercised by the shareholders collectively. A corporation has a board of directors that is responsible for the corporation's policy and appoints the senior management of the corporation. The board of directors is usually appointed by the collective vote of the shareholders;
(f) In practice, however, some shareholders may exert much more influence or control over the policies and operations of a corporation than others:
(i) The voting rights of shareholders may not be equal. Some types of shares may carry no voting rights, while others may carry exceptional rights, such as the right to make specific appointments to the board of directors or the right to veto other appointments made on a majority vote. Such exceptional rights may be held by the Government when it is a shareholder in a corporation;
(ii) Many shareholders with voting rights do not choose to exercise them. Voting usually requires attendance at general meetings of the shareholders or the nomination of another shareholder as a proxy with authority to vote on behalf of the original shareholder. In practice, many shareholders may not exercise their voting rights, so that a small, organized minority of active shareholders may be in a position to control the policy and operations of a corporation. |
| 4.25. | Two characteristics of a corporation are worth noting. The first is that a corporation cannot be a final consumer. In contrast to an NPI, it cannot incur final expenditures for the benefit of households. When a corporation provides goods or services to its employees, these must be either compensation of employees paid in kind or intermediate consumption, depending upon the reason for providing the goods and services. The second characteristic is that the whole of the profit or income accruing to a corporation ultimately benefits other institutional units, namely its shareholders. This again differentiates a corporation from an NPI, which, by definition, cannot generate an income that can be appropriated by other institutional units. |
Ownership and control of corporations
| 4.26. | The ownership of a corporation is diffused among the institutional units that own its shares in proportion to their shareholdings. It is possible for a single institutional unit, another corporation or a household or a government unit, to own all the equity or shares in a corporation but, in general, ownership is diffused among several, possibly very many, institutional units. |
| 4.27. | A single institutional unit owning more than a half of the shares, or equity, of a corporation is able to control its policy and operations by outvoting all other shareholders, if necessary. Similarly, a small, organized group of shareholders whose combined ownership of shares exceeds 50 per cent of the total is able to control the corporation by acting in concert. There may be exceptional cases in which certain shareholders enjoy privileged voting rights, such as a right of veto, but in general an individual institutional unit or group of units owning more than half the voting shares of a corporation can exercise complete control by appointing directors of its own choice. The degree of autonomy exercised by the directors and managers of a corporation is, therefore, likely to vary considerably, depending upon the extent to which the ownership of its shares is concentrated in the hands of a small number of other institutional units, whether these are other corporations, households or government units. In general, institutional units do not have to be autonomous but they do have to be responsible, and accountable, for the decisions and actions they take. |
| 4.28. | Because many shareholders do not exercise their voting rights, a single shareholder, or small number of shareholders acting together, may be able to secure control over a corporation, even though they may hold considerably less than half of the total shares. When ownership of shares is widely diffused among a large number of shareholders, control may be secured by owning 20 per cent or less of the total shares. |
| 4.29. | However, it is not possible to stipulate a minimum shareholding below 50 per cent which will guarantee control in all cases. The minimum must vary depending upon the total number of shareholders, the distribution of shares among them, and the extent to which small shareholders take an active interest, etc. |
| 4.30. | As explained later in this chapter, the sub-sectors of the System require private corporations to be separated from public corporations subject to control by government units, and also private corporations controlled by non-resident units to be separated from other private corporations. In both cases, control is defined as the ability to determine general corporate policy by appointing appropriate directors, if necessary. Owning more than half the shares of a corporation is evidently a sufficient, but not a necessary, condition for control. Nevertheless, because it may be difficult to identify those corporations in which control is exercised by a minority of shareholders, it is recommended that, in practice, corporations subject to public or foreign control should normally be confined to those in which governments or non-residents own a majority of the shares. This recommendation is intended only as a practical guideline, however, to which exceptions can be admitted if there is other evidence of control. For example, a corporation which a government is able to control as a result of special legislation should be treated as a public corporation even if the government does not own a majority of the shares. |
Subsidiary, associate and holding corporations
| 4.31. | It is common for corporations to own shares in other corporations, and certain inter-relationships between corporations need to be specified for purposes of the System. |
Subsidiary corporations
| 4.32. | Corporation B is said to be a subsidiary of corporation A when:
(a) Either corporation A controls more than half of the shareholders' voting power in corporation B; or
(b) Corporation A is a shareholder in corporation B with the right to appoint or remove a majority of the directors of corporation B. |
| 4.33. | Corporation A may be described as the parent corporation in this situation. As the relationship of a parent corporation to a subsidiary is defined in terms of control rather than ownership, the relationship must be transitive: that is, if C is a subsidiary of B and B is a subsidiary of A, then C must also be a subsidiary of A. If A has a majority shareholding in B while B has a majority shareholding in C, A cannot also have a majority shareholding in C. Nevertheless, A must be able to control C if it controls B. By analogy with families of persons, corporation B can be described as a first generation subsidiary of corporation A, and corporation C as a second generation subsidiary of A. Evidently, large families of corporations may be built up with any number of subsidiaries at each level or generation and also any number of generations. Very large families of corporations, described as conglomerates, are encountered in some countries. Conglomerates may include corporations resident in different countries, in which case the parent corporation is usually described as a multinational corporation. |
Associate corporations
| 4.34. | Corporation B is said to be an associate of corporation A when corporation A and its subsidiaries control between 10 per cent and 50 per cent of the shareholders' voting power in B so that A has some influence over the corporate policy and management of B. |
| 4.35. | By definition, a corporation is able to exert less influence over an associate corporation than over a subsidiary. Although some corporations may be able to exert considerable influence over their associates, this cannot be guaranteed. The relationship between associates is weaker than that between parent and subsidiary corporations, and groups of associates may not be well defined. |
Groups of corporations and holding corporations
| 4.36. | As described above, large groups of corporations, or conglomerates, may be created whereby a parent corporation controls several subsidiaries, some of which may control subsidiaries of their own, etc. Two different types of parent corporation may be distinguished. The first consists of a corporation with significant production of its own which acquires control over other corporations in order to strengthen its own position as a producer. It may, for example, acquire control of a corporation that supplies it with components, or it may acquire control of a competitor. |
| 4.37. | On the other hand, the principal function of a corporation may be to control and direct a group of subsidiaries, without having any other significant production of its own. Such a corporation is described as a "holding corporation" or "holding company". |
| 4.38. | For certain purposes, it may be desirable to have information relating to a group of corporations as a whole. However, with the exception of ancillary corporations described in the next section, each individual corporation should be treated as a separate institutional unit, whether or not it forms part of a group. Even subsidiaries which are wholly owned by other corporations are separate legal entities that are required by law and the tax authorities to produce complete sets of accounts, including balance sheets. Although the management of a subsidiary corporation may be subject to the control of another corporation, it remains responsible and accountable for the conduct of its own production activities. |
| 4.39. | Another reason for not treating groups of corporations as single institutional units is that groups are not always well defined, stable or easily identified in practice. It may be difficult to obtain data for groups whose activities are not closely integrated. Moreover, many conglomerates are much too large and heterogeneous for them to be treated as single units, and their size and composition may be continually shifting over time as a result of mergers and takeovers. |
2. Ancillary corporations
| 4.40. | An ancillary corporation may be defined as:
a subsidiary corporation, wholly owned by a parent corporation, whose productive activities are ancillary in nature: that is, are strictly confined to providing services to the parent corporation, or other ancillary corporations owned by the same parent corporation. |
| 4.41. | As described in chapter V, a productive activity is described as ancillary when its sole function is to produce one or more common types of services for intermediate consumption within the same enterprise. The kinds of services which may be produced by ancillary activities are transportation, purchasing, sales and marketing, various kinds of financial or business services, computing and communications, security, maintenance, and cleaning. These are typically services that are likely to be needed, to some extent or other, in most enterprises, whatever the nature of their principal activities. Neither the inputs into, nor the outputs from, ancillary activities are recorded separately from others consumed or produced by the principal or secondary productive activities. |
| 4.42. | A corporation may find it advantageous for tax or other reasons to create a subsidiary corporation purely in order to perform certain ancillary activities for its own benefit. For example, it may create a subsidiary to which ownership of its land, buildings or equipment is transferred and whose sole function is to lease them back again to the parent corporation; or it may create a subsidiary to keep its accounts and records on a separate computer installation; and so on. In some cases, corporations may create "dormant" subsidiaries which are not actually engaged in any production but which may be activated at the convenience of the parent corporation. |
| 4.43. | Ancillary corporations are not treated as separate institutional units in the System. When a parent corporation has created a single ancillary corporation, the ancillary corporation should be treated as an integral part of the parent and its accounts consolidated with those of the parent. When a parent corporation has created several ancillary corporations, they should all be combined with the parent corporation to form a single institutional unit. |
| 4.44. | Ancillary corporations are not treated as separate institutional units because they can be regarded as artificial units created to avoid taxes, to minimize liabilities in the event of bankruptcy, or to secure other technical advantages under the tax or corporation legislation in force in a particular country. |
3. Cooperatives, limited liability partnerships, etc.
| 4.45. | In addition to entities calling themselves corporations or companies, there are also other legal entities created for the purpose of engaging in market production for profit but which may be described differently because they have rather specialized functions. Such entities are classified as corporations in the System. |
| 4.46. | They include, for example, cooperatives set up by producers for purposes of marketing their collective output. The profits of such cooperatives are distributed in accordance with their agreed rules and not necessarily in proportion to shares held, but effectively they operate like corporations. Similarly, partnerships whose members enjoy limited liability are separate legal entities which behave like corporations. In effect, the partners are at the same time both shareholders and managers. |
| 4.47. | In general, all entities, however they may describe themselves or whatever they may be called, which are set up for purposes of engaging in market production, which are capable of generating a profit or other financial gain for their owners and which are recognized at law as separate legal entities from their owners who enjoy limited liability, are treated as corporations in the System. |
| 4.48. | Conversely, some legal entities that are NPIs may sometimes be described "corporations". The status of an institutional unit cannot always be inferred from its name, and it may be necessary to examine its objectives and functions. |
4. Quasi-corporations
| 4.49. | Quasi-corporations are unincorporated enterprises that function as if they were corporations. A quasi-corporation may be:
either an unincorporated enterprise owned by a resident institutional unit that is operated as if it were a separate corporation and whose de facto relationship to its owner is that of a corporation to its shareholders: such an enterprise must, of course, keep a complete set of accounts
or an unincorporated enterprise owned by a non-resident institutional unit that is deemed to be a resident institutional unit because it engages in a significant amount of production in the economic territory over a long or indefinite period of time. |
| 4.50. | For purposes of sectoring and sub-sectoring, quasi-corporations are treated as if they were corporations: that is, as separate institutional units from the units to which they legally belong. Thus, quasi-corporations owned by households or government units are grouped with corporations in the non-financial or financial corporate sectors. Three main kinds of quasi-corporations are recognized in the System:
(a) Unincorporated enterprises owned by government units which are engaged in market production and which are operated in a similar way to publicly owned corporations;
(b) Unincorporated enterprises, including unincorporated partnerships, owned by households which are operated as if they were privately owned corporations;
(c) Unincorporated enterprises which belong to institutional units resident abroad: these consist of the permanent branches, or offices of foreign corporate or unincorporated enterprises, or of production units belonging to foreign enterprises which engage in significant amounts of production within the economic territory over long, or indefinite, periods of time; e.g., units engaged in the construction of bridges, dams or other large structures. |
| 4.51. | The intent behind the concept of a quasi-corporation is clear: namely, to separate from their owners those unincorporated enterprises which are sufficiently self-contained and independent that they behave in the same way as corporations. If they function like corporations, they must keep complete sets of accounts. Indeed, the existence of a complete set of accounts, including balance sheets, for the enterprise is a necessary condition for it to be treated as quasi-corporation. Otherwise, it would not be feasible from an accounting point of view to distinguish the quasi-corporation from its owner. |
| 4.52. | As a quasi-corporation is treated as a separate institutional unit from its owner, it must have its own value added, saving, assets, liabilities, etc. It must be possible to identify and record any flows of income and capital that are deemed to take place between the quasi-corporation and its owner. The amount of income withdrawn from a quasi-corporation during a given accounting period is decided by the owner, such a withdrawal being equivalent to the payment of a dividend by a corporation to its shareholder(s). Given the amount of the income withdrawn, the saving of the quasi-corporation (i.e., the amount of earnings retained within the quasi-corporation) is determined. A balance sheet is also needed for the quasi-corporation showing the values of its fixed assets - land, buildings, machinery and equipment, inventories - used in production and also the financial assets and liabilities - owned or incurred in the name of the enterprise - bank deposits, overdrafts, trade credit and debits, other receivables or payables, etc. It is assumed that the owner's net equity in a quasi-corporation is equal to the difference between the value of its assets and the value of its other liabilities so that the net worth of the quasi-corporation is always zero in practice. The owner may invest more capital in the enterprise or withdraw capital from it by disposing of some of its assets, and such flows of capital must also be identifiable in the accounts whenever they occur. |
| 4.53. | Experience has shown that countries have difficulty distinguishing quasi-corporations owned by households. However, it is not useful to introduce additional criteria, such as size, into the definition of quasi-corporations owned by households as such criteria do not help in practice if the enterprise in question is not in fact operated like a corporation and does not have a complete set of accounts of its own, however large it may be. |
5. Non-profit institutions
| 4.54. | Non-profit institutions are legal or social entities created for the purpose of producing goods and services whose status does not permit them to be a source of income, profit or other financial gain for the units that establish, control or finance them. In practice, their productive activities are bound to generate either surpluses or deficits but any surpluses they happen to make cannot be appropriated by other institutional units. The articles of association by which they are established are drawn up in such a way that the institutional units which control or manage them are not entitled to a share in any profits or other income which they receive. For this reason, they are frequently exempted from various kinds of taxes. |
| 4.55. | The motives leading other institutional units - whether persons, corporations, or government - to create NPIs are varied. For example, NPIs may be created to provide services for the benefit of the persons or corporations who control or finance them; or they may be created for charitable, philanthropic or welfare reasons to provide goods or services to other persons in need; or they may be intended to provide health or education services for a fee, but not for profit; or they may be intended to promote the interests of pressure groups in business or politics; etc. Although they may provide services to groups of persons or institutional units, by convention they are deemed to produce only individual services and not collective services. |
The characteristics of NPIs
| 4.56. | The main features of NPIs may be summarized as follows:
(a) Most NPIs are legal entities created by process of law whose existence is recognized independently of the persons, corporations or government units that establish, finance, control or manage them. The purpose of the NPI is usually stated in the articles of association or similar document drawn up at the time of its establishment. In some countries, especially developing countries, an NPI may be an informal entity whose existence is recognized by the society but which does not have any formal legal status; such NPI may be created for the purpose of producing non-market goods or services for the benefit of individual households or groups of households;
(b) Many NPIs are controlled by associations whose members have equal rights, including equal votes on all major decisions affecting the affairs of the NPI. Members enjoy limited liability with respect to the NPIs operations;
(c) There are no shareholders with a claim on the profits or equity of the NPI. The members are not entitled to a share in any profits, or surplus, generated by the productive activities of the NPI, such profits being retained within the NPI;
(d) The direction of an NPI is usually vested in a group of officers, executive committee or similar body elected by a simple majority vote of all the members. These officers are the counterpart of the board of directors of a corporation and are responsible for appointing any paid managers;
(e) The term "non-profit institution" derives from the fact that the members of the association controlling the NPI are not permitted to gain financially from its operations and cannot appropriate any surplus which it may make. It does not imply that an NPI cannot make an operating surplus on its production. |
NPIs as market and non-market producers
| 4.57. | As in the case of producer units owned by government units, it is important to distinguish between NPIs engaged in market and non-market production as this affects the sector of the economy to which NPI is allocated. NPIs do not necessarily engage in non-market production. |
NPIs engaged in market production
| 4.58. | Market producers are producers that sell most or all of their output at prices that are economically significant - i.e., at prices which have a significant influence on the amounts the producers are willing to supply and on the amounts purchasers wish to buy. Schools, colleges, universities, clinics, hospitals, etc. constituted as NPIs are market producers when they charge fees which are based on their production costs and which are sufficiently high to have a significant influence on the demand for their services. Their production activities must generate an operating surplus or loss. Any surpluses they make must be retained within the institutions as their status prevents them from distributing them to others. On the other hand, because of their status as "non-profit institutions" they are also able to raise additional funds by appealing for donations from persons, corporations or government. In this way, they may be able to acquire assets which generate significant property income in addition to their revenues from fees, thereby enabling them to charge fees below average costs. However, they must continue to be treated as market producers so long as their fees are determined mainly by their costs of production and are high enough to have a significant impact on demand. Such NPIs are not charities, their real objective often being to provide educational, health or other services of a very high quality using their incomes from endowments merely to keep down somewhat the high fees they have to charge. |
Market NPIs serving businesses
| 4.59. | Most market NPIs serving businesses are created by associations of the businesses whose interests they are designed to promote. They consist of chambers of commerce, agricultural, manufacturing or trade associations, employers' organizations, research or testing laboratories or other organizations or institutes which engage in activities which are of mutual interest or benefit to the group of businesses that control and finance them. The NPIs often engage in publicity on behalf of the group, lobby politicians or provide advice or assistance to individual members in difficulty for one reason or another. The NPIs are usually financed by contributions or subscriptions from the group of businesses concerned. The subscriptions are treated not as transfers but as payments for services rendered and these NPIs are, therefore, classed as market producers. However, as explained below, when chambers of commerce or similar organizations for the benefit of businesses are controlled and mainly financed by government units, they are classified as non-market NPIs and allocated to the general government sector. |
NPIs engaged in non-market production
| 4.60. | The majority of NPIs in most countries are non-market rather than market producers. Non-market producers are producers that provide most of their output to others free or at prices which are not economically significant: that is, at prices which do not have a significant influence on the amounts the producers are willing to supply or on the amounts purchasers wish to buy. Thus, NPIs engaged mainly in non-market production may be distinguished not only by the fact that they are incapable of providing financial gain to the units which control or manage them, but also by the fact that they must rely principally on funds other than receipts from sales to cover their costs of production or other activities. Their principal source of finance may be regular subscriptions paid by the members of the association that controls them or transfers or donations from third parties, including government. |
| 4.61. | NPIs engaged mainly in non-market production may be divided into two main groups: those NPIs controlled and mainly financed by government and those NPIs providing non-market goods and services to households financed mainly by transfers from non-governmental sources - households, corporations or non-residents. The second group are described as "NPIs serving households" (NPISHs) and constitute a separate sector in the System. |
NPIs controlled and mainly financed by government
| 4.62. | NPIs controlled and mainly financed by government must be properly constituted legal entities which exist separately from government. In this context, control is to be understood as the ability to determine the general policy or programme of the NPI by having the right to appoint the officers managing the NPI. Such NPIs may be engaged in research or development, for example, for the benefit of certain groups of producers, such as farmers. They may also be concerned with the setting or maintenance of standards in fields such as health, safety, the environment, accounting, finance, education, etc., for the benefit of both enterprises and households. Governments find it appropriate to create NPIs for this purpose, rather than using agencies of government to carry out the same functions, because NPIs concerned with public standards may need to be seen as detached and objective, and not subject to political pressures. NPIs controlled and financed by government are allocated to the general government sector, irrespectively of the types of institutional units that mainly benefit from their activities. |
| 4.63. | In some countries, certain legal entities created by government units may have the characteristics of, and behave like, NPIs controlled and mainly financed by government units and yet be formally described as "corporations". Such entities must be treated as NPIs whatever their names. In general, the status of a legal entity cannot be automatically ascertained from its name and it is necessary to take account of its functions and purpose. |
NPIs serving households (NPISHs)
| 4.64. | Non-profit institutions serving households (NPISHs) consist of NPIs which provide goods or services to households free or at prices that are not economically significant. Two main types of NPISHs may be distinguished. |
| 4.65. | The first type consists of NPISHs which are created by associations of persons to provide goods or, more often, services primarily for the benefit of the members themselves. The services are usually provided free, being financed by regular membership subscriptions or dues. They include NPISHs such as professional or learned societies, political parties, trade unions, consumers' associations, churches or religious societies, and social, cultural, recreational or sports clubs. They do not include bodies serving similar functions that are controlled and mainly financed by government units, except that churches are always treated as serving households even when mainly financed by government units. Political parties in countries with one-party political systems that are controlled and financed by government units are always included in the general government sector. |
| 4.66. | In some communities, NPISHs may be found which do not possess any legal status or formal articles of association. They should be treated as NPISHs when they perform the same kinds of functions as the societies, parties, unions, etc., described above, even if they are not legally constituted as NPISHs. However, when groups of households collaborate on communal construction projects (such as construction of buildings, roads, bridges, ditches, dykes, etc.), they should be treated as informal partnerships engaged on own-account construction rather than NPISHs. NPISHs should normally have a continuing role to play and not be deemed to be created for single projects of limited duration. |
| 4.67. | The second type of NPISH consists of charities, relief or aid agencies that are created for philanthropic purposes and not to serve the interests of the members of the association controlling the NPISH. Such NPISHs provide goods or services on a non-market basis to households in need, including households affected by natural disasters or war. The resources of such NPISHs are provided mainly by donations in cash or in kind from the general public, corporations or governments. They may also be provided by transfers from non- residents, including similar kinds of NPISHs resident in other countries. |
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