The Structure of Corporations

Corporations

Corporations are towers on the business landscape. Corporations are few in number, but generally large in size, and they play a powerful role in this country and in others. For example, corporations employ millions of people, have many layers of management, and provide consumers with many of the goods and services they use daily. Not all corporations are large.

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 form 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. The owners of a corporation are stockholders. Ownership is divided into equal parts called shares. A person who buys one share becomes a stockholder, or a shareholder. The board of directors is the ruling of the corporation. The stockholder elect board members. Directors have the management oversight responsibilities to develop plans and policies to guide the corporation as well as appoint officers to carry out the plans. The officers of a corporation are the top executives who are hired to manage the business. The officers of a small corporation often consist of a president, a secretary, and a treasurer. A large corporation may have vice presidents in charge of major areas, such as marketing, finance, and manufacturing.

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 businesses in the same manner that partners operate a business. In most states, a close corporation does not need to make its financial activities known to the public. It must, however, prepare reports for the state from which it obtained its charter, and 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. One way to announce the sale of common stock to the public is with an ad in the newspaper. The corporation must file a registration statement with the Securities and Exchange Commission (SEC) containing extensive details about the corporation and the proposed issue of stock.

Preparing the Certificate of Incorporation

A business is usually required by law to have a name by law to have a name that indicates clearly that a corporation has been formed. A certificate of incorporation requires a corporation to describe its purpose clearly. Usually a new corporation must pay an organization tax, based on the amount of its capital stock. In addition, a new corporation usually pays a filing fee before the state will issue a charter entitling the business to operate as a corporation. In some states, the existence of the corporation begins when the application begins when the application or certificate of incorporation has been filed with the appropriate state agency.

Operation the New Corporation

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 was. The ownership of the corporation, however, is evidenced by the issued capital stock. The former partners each received a stock certificate indicating that each owns 2,217 shares of stock with a value of $100 a share. Voting stockholders usually have one vote for each share owned. Even stockholders with just one share must receive notices of meetings. If stockholders cannot attend the meetings personally, they can be represented through a proxy that can be submitted by Internet, phone, or mail. A proxy is a written authorization for someone to vote on behalf of the person signing the proxy. Corporations often enclose a proxy form with the letter that announces a stockholders' meeting.

Management Issues for Corporations

A corporation can help to solve some of the management issues found with proprietorships and partnerships. At the same time. corporations have their own management issues. A corporation an obtain money from several sources. One of those sources is the sale of shares to stockholders. Because corporations are regulated closely, people usually invest more willingly than in proprietorships and partnerships. In addition, corporations usually find borrowing large sums of money less of a problem than do proprietorships or partnerships. Stockholders are more willing to invest in a corporation when there is no possibility of incurring a liability beyond their original investment. At the same time, directors and managers may be more willing to work with a corporation when they cannot be personally liable for debts of the corporation. The corporation is a more permanent type of organization than the proprietorships or the partnership. Directors and managers can change over time without affecting the operation or ownership of a corporation.

Taxation

The corporation is usually subject tomlorentaxes than are impairs on the proprietorship and the partnership. Some taxes that are unique to the corporation are filing fee, which is payable on application for a charter; an organization tax, which is based on the amount of authorized capital stock; an annual state tax, based on the profits; and a federal income tax. Another tax disadvantage for corporations is that profits distributed to stockholders as dividends are taxed twice. This double taxation occurs in two steps. The corporation first pays taxes on its profits. Then it distributes some of these profits to shareholders as dividends, and the shareholders pay taxes on the dividends they receive.

Government Regulations and Reports

A corporation cannot do business wherever it pleases. To form a corporation, an application for a charter must be submitted to the appropriate state official, usually the secretary of state. State incorporation fees are not very expensive. The attorney's fee accounts for the major costs of incorporating. Each state has different laws that govern the information of corporations. The regulation of corporations by states and by the federal government is extensive. Managers must ensure that the corporation files special reports with the state from which it received its charter as well as with other states where it conducts business. The federal government requires forms whose stock is publicly traded to publish financial data. As a result, there is a greater need for detailed financial records and reports.

Records and Restrictions

Corporations that have many stockholders have added problems - and expenses - in communicating with stockholders and in handling stockholders' records. By law, stockholders must be informed of corporate matters, notified of meetings, and given the right to vote on important matters. Letters and reports must be sent to stockholders on a regular basis. A corporation is allowed to engage only in those activities that are stated in its charter. As a partnership, they could have added the other line of merchandise without government approval.

Agency Dilemma

An agency dilemma can occur when an agent, or someone who works for another, purses their own interest over their employers. Managers could try to persuade the board of directors in increase management pay, diminishing returns to stockholders. Corporate boards must ensure that managers perform their duties for the benefit of the corporation owners, the stockholders.