Corporations

Towers of the Business Landscape

What is a Corporation?

A corporation is a business owned by a group of people and authorized by the state in which it is located to act as one person, separate from its owners. It is essentially an artificial person created by the laws of the state. A corporation can make contracts, borrow money, own property, and sue or be sued by its own name.

How Do I Get Started?

There are three steps to forming a corporation:


  • Making a series of management decisions
  • Preparing and sending the proper legal forms to the state
  • Approval of the legal forms by the state resulting in a charter from the state



Each state has its own laws for forming a corporation, that's why a certificate of incorporation must be sent to the state requesting permission to form a corporation. The certificate of incorporation contains the basic information about the business, such as: firm name, purpose, capital stock, and information about the organizers. If there are any major changes in the business' purpose, the company must send in a new certificate of incorporation to be improved by the state.


A business' name is usually required by law to indicate clearly that it is a corporation by adding words such as Corporated, Corp., Incorporated, or Inc. at the end. An example would be York, Burton, and Chan, Inc.


A new corporation commonly must pay an organization tax, based on the amount of its capital stock. In addition, there is usually a filing fee before the state will issue a charter to the business allowing it to become a corporation.


One of the first steps in organizing a new corporation is to create a balance sheet that shows capital stock as a claim against assets, or a statement of financial position. Another important issue is to decide how many votes each stockholder has. Commonly, stockholders receive one vote for each stock owned.

Corporations Are Made Up of Three Key Types of People.

Stockholders

Ownership of the company is divided into equal parts called shares. The people who buy these shares are called stockholders or shareholders. Each stockholder receives a certificate from the corporation showing the number of shares owned.


There are several basic rights each stockholder has:


  • Transfer ownership to others
  • Vote for the members of the ruling body and on other special matters
  • Receive dividends (profits that are distributed to stockholders on a per-share basis.)
  • Buy new shares of stock should the corporation issue more shares
  • Share in the net proceeds (cash received from the sale of all assets)



Stockholders have no liability beyond the extent of the stockholder's ownership. Therefore, if the corporation goes bankrupt, the stockholder only loses the money he/she invested.

The Board of Directors

Stockholders elect board members, who develop plans and policies to guide the corporation as well as appoint officers to carry out the plans. If the corporation is running smoothly, board members are normally content with running policy issues and reviewing the progress of the company. If the corporation is experiencing serious difficulties, or its profits are falling, the board will take an active role in the operational management of the business.


The board of directors usually consists of 10 to 25 directors. These directors are usually people from outside the corporation, such as college professors. Commonly, directors are stockholders who own many shares, but this does not have to be the case.

Officers

Officers are top executives who are hired to manage the business. They are appointed by the board of directors, and often consist of a president, secretary, and a treasurer. These officers often have titles such as CEO (chief executive officer) or CFO (chief financial officer). They carry out the board of director's plans.

There Are Two Types of Coporations

A Close Corporation

Also called a closely held corporation, this type of corporation does not sell its shares to the public. In most states, a closed corporation also does not need to make its financial activities known to the public.


It must, however, prepare reports for the state it obtained its charter from and prepare reports for tax purposes for all states in which it operates.

An Open Corporation

Also called a publicly owned corporation, this type of corporation sells its shares to the public. This 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. A condensed version of this document, or prospectus, must be sent to each prospective buyer of stocks.

Advantages

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Sources of Capital

Corporations can obtain money from several different sources, and this often makes borrowing large sums of money easier than for a proprietorship or partnership.

Limited Liability

If the company fails, the owners (stockholders) are only liable for the amount of money they invested in the company.

Permanency of Existence

Corporations can continue to operate indefinitely or only as long as the term stated in the charter. For a proprietorship, if the owner dies, the company usually fails. For a partnership, if one of the owners dies, there is usually a legal hassle. This doesn't occur for a corporation.

Ease in Transferring Ownership

A stockholder can sell his/her stock to another person easily by transferring the stock certificate to the new owner. When ownership is transferred, it is indicated in the records of the corporation.

Disadvantages

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Taxation

Corporations are usually subject to more taxes than a proprietorship or partnership. Among these are a filing fee, organization tax, annual state tax (based on the profits), and a federal income tax. Also, profits distributed to stockholders as dividends are taxed twice.

Government Regulations And Reports

A corporation is limited on where it can do business. If a corporation receives a charter to conduct business in New York, it may only conduct business in New York. For every new state a corporation want to expand into, a license must be obtained and a fee to do business in the state must be payed.


Furthermore, managers must make sure to file special reports with the state from which it received its charter as well as the other states it's conducting business in.

Stockholder's Records

Large corporations can have added problems and expenses in communicating with its stockholders and handling its stockholders' records. Stockholders must be informed of corporate matters, notified of meetings, and given the right to vote on important matters. Also, each time stock is sold or a dividend is payed, detailed records must be kept.

Charter Restrictions

A corporation is only allowed to engage in the activities stated in its charter. Each state has different rules and regulations for its businesses.

Agency DIlemma

This can occur when an agent, or someone who works for another, pursues their own interest over the employers. For example, managers can pursue their own interests over stockholders by only making purchases that benefit managers.