Corporations

Structure of Corporations

Corporations are generally few in number but large in size. Corporations employ millions of people, have many layers of management, and provide consumers with many of the goods and services they use daily. In the recent year, corporate sales of goods and services were more than 20 times greater than sales of proprietorships in the US.

Basic Features

A corporation is a business owned by a group of people and authorized by the state in which it is located to act as though it were a single person, separate from its owners. To get permission to open a corporation, organizers must obtain a charter. A charter is the 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 in its own name. Any act performed for the corporation by an authorized person, such as an employee, is done in the name of the business.

There are three key types of people in corporations: stockholders, directors, and officers.

Close and Open Corporations

A close corporation is one that does not offer its shares of stock for public sale. Just a few stockholders own it; some of them may help run the business like a partnership. A close corporation does not need to make its financial activities known to the public. However, it must prepare reports for tax purposes for all states in which it operates.


An open corporation is one that offers its shares of stock for public sale. The corporation must file a registration statement with the Securities and Exchange Commission containing extensive details about the corporation and the proposed issue of stock. A shortened version of this statement, called a prospectus, must be given to each prospective buyer of newly offered stocks. A prospectus us a formal summary of the chief features of the business and its stock offering. Potential buyers use the prospectus to help them decide if they want to buy stock in that corporation.

Formation of Corporations

Three basic steps are involved in forming a corporation. First, a series of management decisions has to be made about how the corporation would be organized. Second, the proper legal forms had to be prepared and sent to the state office that handled such matters. Third, the state would review the incorporation papers and issue a charter if approved. The certificate of incorporation calls for basic information about the business including the firm name, purpose, capital stock, and information about the organizers.

Operating a New Corporation

Getting Organized

One of the first steps in getting the new corporation under way is to prepare a balance sheet or statement of financial position. The ownership of the corporation is in the same hands as the ownership of the partnership. However, the ownership of the corporation is evidenced by the issued capital stock.

Management Issues for Corporations

  • Sources of capital
  • Limited liability
  • Permanency of existence
  • Ease in transferring ownership
  • Taxation
  • Government regulations and reports
  • Stockholders' records
  • Charter restrictions
  • Agency dilemma