Corporations

The towers on 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 though it were a single person, separate from its owners. In order to get permission to form a corporation, organizers must obtain a charter. A charter, or a certificate of incorporation, is the official document through which a state grants the power to operate as a corporation. By obtaining a charter the corporation is considered 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 company by an employee is done as a representation of the business.

Who owns a Corporation?

The owners of a Corporation are the Stockholders. The ownership is divided into equal parts known as shares. A person who buys a share is called a stockholder or a shareholder. Thousands of people can own a corporation. Each Stockholder has specific rights. These rights include


  • Transferring of Ownership to others
  • Vote for members in the body of the Corporation and other special decision that might be voted on my shareholders
  • Receive dividends. Dividends are profits that are distributed to the stockholders based on how many shares they own. This decision is made by the ruling body of the corporation.
  • Buy new shares of stock by proportion to a present investment should the corporation give out more shares.
  • Share in the cash received from the sale of all assets should the corporation go out of business.
But stockholders do not have the same financial responsibility as a partner, there is no liability beyond the extent of the shareholders ownership. If the corporation fails a stock holder only loses the money invested. Creditors cannot collect anything from the stockholder.

What is the Ruling Body of the Corporation?

The ruling body, also known as the directors, are elected in by the shareholders. Directors have the management oversight responsibilities to develop plans and rules to guide the corporation. If the corporation is performing well, the board is content with policy issues. On the other hand, if the corporation's profits fall, or has a sever difference, the board often steps in and takes a role in the operational management of the business. In larger corporations the board usually consists of 10 to 25 directors. A few of the board members are top executives from within the corporation. Most directors are often from outside the corporation and are usually executives from other businesses. Directors are sometimes stockholders who hold many shares in the company, but directors do not need to be stockholders. In countries such as Sweden, China, and France, one employee of the company is also a board member.

Who are the top executives?

Officers of a corporation are the top executives. They are hired to manage the business. The board of directors vote for them. The officers of a smaller corporation usually consist of a president, a secretary, and a treasurer. The officers of a larger corporation consists of the ones in the smaller corporations as well as others such as a vice president, in charge of marketing, finance, and manufacturing of the corporation. The titles of the officers are shortened into letters. For example the top officer (President) would be called a CEO (Chief Executive Officer) and the head financial officer (Treasurer) would be called the CFO (Chief Financial Officer).

Closed Corporations

A close corporation is one that does not offer its shares to the public. These companies are also called private companies. Just a few stockholders own a share in a closed corporation, some even help run the business in the same manner as partners operate a business. In most states, a closed corporation doesn't need to make its financial activities known to the public. But a closed corporation still has to prepare reports for the state which is accessible because of the charter. It also has to prepare reports for tax purposes for all of the states that it operates in.

Open Corporations

An open corporation is one that is public. This means that it offers shares for normal people to buy. One way to announce the sale of a corporation's stock is through a newspaper ad. The corporation must file a registration statement with the Securities and Exchange Commission (SEC) containing a bunch of detail about the corporation itself and the proposed issue of stock. A condensed version of this registration statement is called a prospectus, this must be furnished to each prospective buyer of newly offered stocks.

Preparing the Certificate of Incorporation

Naming the business- A business usually requires to have that indicates what that corporation has formed. Words or abbreviations such as Corporation, Corp., Incorporates, or Inc. are used.

Stating the purpose of the Business- A certificate of incorporation requires a corporation to describe its purpose clearly. For example a retail food business. It allows the corporation to expand into a few new food lines, but it does not allow for the corporation to begin nonfood operations. For major changes in purpose, a new request muse be submitted and approved by the state.

Investing in the business- The certificate of incorporation could not be completed until to company decided how to invest their partnership holdings in the corporation. It is at this point that the partners can decide if the debts from the partnership carry over to the corporation. They also decide the value and number of stocks available to people.

Paying incorporation Costs- Usually a new corporation must pay an organization tax, based on the amount of its stock capital. A new corporation must also pay its fees before the stare will give them a charter entitling the business to become a corporation. Some state allow for the existence of the corporation to begin once the application or certificate of incorporation has been filed with a state agent.

Operating a new Corporation

Get Organized- One of the first steps for a new corporation id to prepare a balance sheet or statement of financial position. The ownership of the corporation is still under the same ownership under the partnership. However, each of the partners all get an equal share in the company. The shareholders (partners) would then elect representatives as directors.

Handling Voting Rights-Voting stockholders usually have one vote for every share owned. However if one of the partners were to sell their shares to another member of the partnership that partner would gain more than 50% of the company. Then the person with the most shares would gain control of that company.

Issues of a Corporation

Source of Capital- A corporation can obtain money from several sources. One of these sources is the sale of shares to stockholders. Because corporations are regulated closely people usually invest more than in proprietorships and partnerships. Corporations usually find borrowing money in large sums of cash is less of a problem than being a proprietorship or a partnership.

Limited Liability- The owners, directors, and managers are not legally liable for the debts of the corporation beyond their investment in the stock purchased. Stockholders are more willing to invest in a corporation when there is no possibility of receiving liability. Directors and Managers may be willing to work with a corporation when they cannot be personally liable for debts of the corporation.

Permanency of Existence- The corporation is more permanent. It can continue to operate indefinitely or as long as the term stated in the charter. The death or withdrawal of an owner or stockholder does not effect the life of a corporation. Directors and managers can change over time without effecting the operation.

Ease in transferring ownership- It is easy to transfer ownership in a corporation. A stockholder may sell stock to another person and transfer the stock certificate, which represents ownership, to a new owner. When shares are transferred, the transfer of ownership is indicated into the record of the corporation. A new certificate is issued in the name of a new stockholder.