Corporations

The structure of Corporations

Corporations are towers on the business landscape. Although proprietorships are many in number, they are generally small in size. Corporations are few in number, but generally large in size. Corporations play a powerful role in this country and in others.

Basic Features

Corporation as I said 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 corporation is in sense, an artificial person created by the laws of the state. 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.

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 in the same manner that partners operate a business.

An Open Corporation is one that offers its share of stocks for public sales. 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. A condensed version of this registration statement, called a prospectus, must be furnished to each prospective buyer of newly offered stocks (or bonds).

A prospectus is a formal summary of the chief features of the business and its stock offering.

Certificate of Incorporation

Each state has its own laws for forming corporations. No federal law exists. To incorporate a business, its necessary in most states to file a certificate of incorporation with the appropriate state office. The certificate of incorporation calls for basic information about the business. In addition, to the firm name, purpose, and the capital stock, it requires information about the organizers.
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Naming the Business

A business is usually required by law to have a name that indicates clearly that a corporation has been formed. Words or abbreviations such as Corporation, Corp, Incorporated, or Inc. are used.

Stating the purpose of the Business

A certificate of the incorporation requires a corporation to describe its purpose clearly. It allows the corporation ti expand into new food lines, but does not allow the corporation to start nonfood operations. For major changes in purpose, a new request must be submitted and approved by the state.

Management Issues for Corporations

The corporation can help solve some of the management issues found with proprietorships and partnerships. At the same time, corporations have their own management issues.


Sources of Capital: A corporation can 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.


Limited Liability: Except in a few situations, the owners (stockholders), directors, and managers are not legally liable for the debts of the corporation beyond their investment in the stock shares purchased. Stockholders are more willing to invest in a corporation when there is no possibility of incurring a liability beyond their original investment.

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. Each state has different laws that govern the formation 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.

Agency Dilemma

An Agency Dilemma can occur when an agent, or someone who works for another, pursues their own interest over their employers. For example, in large corporations where stock ownership is broadly spread over a large number of stockholders, managers may look to their own interests over stockholders by making purchases that benefit only managers. Managers could try to persuade the board of directors to 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.