Corporations

Brittany Woodward

What is it?

A corporation is a business owned by a group of people and authorized by the state which it's located to act as though it were single person, separate from its owner. To get permission to form a corporation a charter must be obtain. A charter (certificate of incorporation) is the official document though which a state grants the power to operate as a corporation. A corporation can make contracts, borrow money, own property, and sue and be sued in its own name.

Three Key Types of People

1. Stockholders are the owners of the business. Ownership divided into equal parts called shares. A person who buys one share becomes a stockholder or shareholder. Each stockholder receives a certificate from the corporation, which show the number of shares owned. These people doesn't have the same responsibilities as a partner - there is no liability beyond the extent of the stockholder's ownership. If a business fails, a stockholder can lose only the money invested. Creditors cannot collect anything further from the stockholders.

2. Board of Directors is the ruling body of a business. The stockholders elect board members which will have the responsibility of managing the oversight to develop plans and policies to guide the corporation as well as appoint officers to carry out the plans. In large firms, boards generally consist of 10-25 directors (a few top executives) mostly outside of the business. Directors are often stockholders who have many shares, but they don't have to be stockholders.

3. Officers of a corporation are the top executives who are hired to manage the business (board appoints). Small corporations consist of a president, secretary, and treasurer. Large corporations may have vice presidents in charge of major areas. Titles are shortened to letter such as CEO (chief executive officer) and the head financial officer is the CFO (chief financial officer).

Closed and Open Corporations

Closed Corporation is the one that doesn't offer its shares of stock for public sale. Just a few stockholders own it; some of them may help run the business in the same manner that partners operate a business. In most states this doesn't need to make its financial activities known to the public. Must prepare reports for the state from which it obtained its charter and report for tax purposes fro all states in which it operates.

Opened Corporations is one that offers its shares of stock fro public sale. Corporations must file a registration statement with the Securities and Exchange Commission containing extensive details about the corporation and the proposed issues of stocks. A condensed version of this registration statement is prospectus.

Preparing the Certificate of Incorporation

Each state has its laws for forming corporations. No federal law exists. To incorporate a business, it is necessary in most states to file a Certificate of Incorporation. The certificate of incorporation calls for basic information about the business (name, purpose, capital stock, and organizers).

Naming the Business: Required by law to have a name that indicates a corporation has been formed. Words or abbreviations are used.

Stating the Purpose: A certificate of incorporation requires a corporation to describe it purpose clearly. For major changes in purpose, a new request must be submitted and approved by the state.

Investing: The certificate of incorporation couldn't be completed until a decision of how to invest their business partnership holding into the corporation.

Paying Incorporation Costs: A new corporation must pay an organization tax, based on the amount of capital stock. New corporations pays a filing fee before the state will issue a charter entitling it as a corporation.

Operating the New Corporation

Getting Organized: First thing to do is to prepare a balance sheet or a statement of financial position. Ownership is evident by the issued capital stock.

Handling Voting Rights: Voting stockholders normally have one vote for each owned share. Each stockholder must be noticed about any meeting and if they cannot be in attendance a proxy can be sent. A proxy is a written authorization for someone to vote on behalf of the person signing the proxy

Management Issues for a Corporations

Sources of Capital: A corporation can obtain money from several sources. One is the sale of shares to stockholders. People are more likely to invest in a closed business. Usually find borrowing large sums of money less of a problem than proprietorship or partnerships.

Limited Liability: The owners (stockholders), directors, and managers are not legally liable for the debts of the corporation beyond their investment in the stock shares purchased.

Permanency of Existence: More permanent type of organization than the proprietorship or partnership. It can continue to operate indefinitely, only as long as the term stated in the charter. Death of owner doesn't effect the life; directors and managers can champagne over time without affecting the business.

Ease in Transferring Ownership: Easy to transfer ownership. A stockholder may sell stock to another person and transfer the stock certificate.

Taxation: Subject to more taxes. Some taxes that are unique to a corporation is filing fee, organization fee, annual state tax, and federal income tax. Profits distributed to stockholders as dividends are taxed twice.

Government Regulations and Reports: Cannot do business wherever they want to. Each state will require the corporation to obtain a license and pay fee to do business in the state. Regulations are very extensive. Managers must ensure that the files special reports with the state from which it received it charter. Federal government requires firm whose stock is publicly traded to publish financial data. Greater need for detailed financial records and reports.

Stockholders' Records: is they have many stockholders they have added problems and expenses in communicating with the stockholders and in handling stockholders

Charter Restrictions: Allowed to engage only those activities that are stated in its charter.

Agency Dilemma: Agency Dilemma can occur when an agent pursues their own interest over their employees. Corporate boards must ensure that managers perform their duties for the benefit of the corporation's owners, the stockholders.