A business owned by a group of people

Structure of a Corporation

Corporations are few in number, but large in size. However, not all corporations are large. They play an extremely powerful role within our country along with many others. Corporations provide customers with many different goods and services. The corporate sales of a corporation are about 20 times greater than those of a Proprietorship.

Basic features of a Corporation

As mentioned above, a corporation is a business owned by a group of people. However, before a corporation can be formed, one must obtain a Charter; an official document through which a state grants the power to operate as a corporation. A corporation can make contracts, borrow money, own property, and sue or be sued. Now let's move onto the people within a corporation. A stockholder is the owner of the corporation. Their ownership is divided into equal parts called shares. The shareholder/stockholder is a person who buys shares of the corporation. Therefore, thousands of people can potentially own a corporation. The board of directors is the ruling body of the corporation. They have the management to develop the plans and policies along with appointing specific officers to carry out the designed plans. In larger firms, boards are typically 10-25 directors, sometimes more. The officers of a corporation are the top executives who are initially hired to manage the business. Officers in a corporation typically consist of: President, Vice President, Secretary, and a Treasurer. Also, corporations may have many Vice Presidents in major areas such as: marketing, finance, and manufacturing.

Close and Open Corporations

A close corporation (closely held corporation) is one that does not offer its shares of stock for public sale. Only a few stockholders own a closed corporation. Also, a closed corporation, does not need to make its financial activities known to the public. A closed corporation is very secluded from public viewing.

An open corporation (publicly owned corporation) is one that offers its shares of stock for public sale, unlike a closed corporation. One way an open corporation announces the sale of a stock is through a newspaper advertisement. An open corporation must also have a prospectus; a formal summary of the chief features of the business and its stock offering.

Formation of Corporations

There are 3 basic steps within forming a corporation: First, a series of management decisions have to be made about how the corporation will be organized. Second, the proper legal forms must be prepared and sent to the state office. Third, the state will review the incorporation papers. Finally, the charter will be issued if approved.

Preparing the Certificate of Incorporation is the next step. Each state has its own laws for forming corporations. To incorporate a business, states need to file a certificate of incorporation with the necessary office. This certificate calls for basic information about the desired business. There is other important information within theses certificates. Naming the business; a business is required by law to have a business name that indicates clearly that a corporation has been formed. Stating the purpose of the business; a certificate of incorporation requires a corporation to describe its purpose clearly. Investing in the business; the certificate can not be completed until the business decides how to invest the partnership holdings into the corporation. Paying incorporation costs; usually a new corporation will pay an organization tax, based on the amount of capital of its stock. Also, the new corporation pays a filing fee before the charter will be issued.

The final step is operating the new corporation. The very first step to complete when getting the new corporation organized is to prepare a balance sheet/statement of financial position.

Management Issues for Corporations

Corporations often help solve management issues within proprietorship and partnerships, but at the same time, corporations have management issues of their own. Sources of capital; a corporation can obtain money from several different sources. People tend to invest more willingly to corporations. Limited liability; with the exception of a certain situation, the owners, directors, and managers are not legally liable for the debts of the corporation beyond their initial investments purchased. Stockholders are more willing to invest if there is no possibility of incurring a liability. Directors and managers are more willing to work for a corporation when they cannot be liable for the possible debts of the corporation. Permanency of existence; the corporation is a more permanent type of organization than a proprietorship or partnership. Directors and managers can change over time without affecting the operation or ownership of the corporation. Ease in transferring ownership; it is easy to transfer ownership within a corporation. A stockholder can sell their stock to someone else, along with transferring the certificate of ownership. Taxation; a corporation is subject to more taxes. Other tax disadvantage for corporations include that the profits are not distributed to the stockholders correctly. Government regulations and reports; a corporations cannot do business whenever it pleases. To form a corporation, an application for a charter must be submitted and approved. Stockholders' records; corporations that have many stockholders have added problems/expenses in communication with stockholders and their records. By law, stockholders must be informed on corporate matters, meetings, and the right to vote on important matters. Charter restrictions; a corporation is allowed to engage only in those activities that a started within its charter. Agency dilemma; can occur when an agent, or an assistant of an agent, pursues their own interest over those of other employees. For example, managers can try to persuade the board of directors to increase management pay, diminishing the wants of others.
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