The few, but powerful.
Definition of 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. The corporation is an artificial person created by the laws of the state by using a charter. A charter is the document that a state gives the power to a business to operate as a corporation.
Why a Corporation?
Why would someone want to go through all the trouble of getting a charter from the state just to call themselves a corporation? The main reason for creating a charter is that any action performed by or for the corporation is done solely in the name of the business. The corporation itself can have legal action taken against it, or take legal action against others.
Three important people in corporations
There are three different types of people that are very important within the inner workings of a corporation. They are stockholders, board of directors, and officers. Each have a large role to play to make the corporation successful.
The true owners of a corporation are its stockholders. The ownership of the corporation is split into equal parts called shares. Anyone can buy a share and can be considered a shareholder of the company. The shareholder has many benefits including, the right to transfer ownership of the share, vote for members of the board, receive dividends, buy new shares, and share in the net proceeds if it goes out of business. The main plus that a shareholder has is that there is no liability beyond their investment. Should the corporation go out of business, creditors cannot collect anything but their original investment.
The main ruling body of the corporation is the board of directors, sometimes shortened to either board or directors. The shareholders elect the board members and the board members then have the management responsibilities of the corporation to develop plans and guide the corporation. The board also has the ability to hire officers to carry out their plans. If the corporation is going well, the board doesn't have much to do, but if it's bad they often step in and take an active role in the management of the business. On average the board of directors have around 10-25 people. Many times, directors are stockholders but directors don't have to have stock in the company to be a director.
Officers are appointed by the board of directors and they are the top executives who are supposed to manage the business. A president, a secretary, and a treasurer are usually the core officers that even small corporations have. The larger corporations could have more vice presidents that are in charge of large parts of the corporation such as marketing, finance, and manufacturing. You most likely have heard of many of the shortened terms for these officers such as CEO and CFO for chief executive officer and chief financial officer respectively.
Stockholders hire -> Directors Hire -> Officers
Closed versus Open
There are two different corporations, one being closed and the other open. The main difference is the fact that a closed corporation is one that does not have its stock open for public sale. Therefore the main shareholders are the same unless the original shareholders wish to sell their shares. An open corporation is the opposite of the closed where their shares are open for the public to buy. Before a shareholder decides on buying a share they are given a prospectus about the business which shows the formal information about the corporation. A prospectus helps shareholders determine if they truly want to risk buying stock in a business.
Basic Startup Procedure
- Preparing the certificate - Since every state has its own laws for forming a corporation, you need to turn in a certificate of incorporation which normally holds the basic information of the business such as the name, purpose, capital stock, and information on the organizers.
- Naming - Normally, a corporation is required by law to have a name that makes it clear they are a corporation. Many add words such as Corporation, Corp, Incorporated, or Inc.
- Purpose - It clearly states what you are wishing to do within your corporation, if you wish to make a large change in the corporation then you have to resubmit a certificate and get it passed.
- Investing - Before you can get a certificate you must determine how much you will invest in your new corporation. This means that you have a choice on how many shares you will buy before others have a chance to get them.
- Fees - The main fee for creating a new corporation is an organization tax, which depends on the amount of startup capital the corporation has.
Stockholders and Voting
When a major change is in process of being completed, the stockholders have the ability to vote and pass or deny an action by the company during a stockholders' meeting. Each share that a person has is a vote that they can cast for the current situation, and every shareholder has to get a notice of a stockholders' meeting. If they cannot attend personally they have to send in a proxy, who is someone that the person has authorized to vote for them.
- Capital problems? - A corporation has easier access to loans that can be paid of easier by the corporation, as well as being able to sell shares in their corporation to obtain capital.
- Limited Liability- Except for a few exceptions, most managers and owners are not legally liable for all the debts of the corporation beyond their initial investment.
- Stability - Unlike a partnership or proprietorship, a corporation is a much more permanent form of a company, and can theoretically can operate indefinitely.
- Ownership - One of the major bonuses for a corporation is the way it can be easily transferred from one person to another simply by selling shares of the company to another.
- Taxes - One of the downsides to a corporation is how many taxes that they have to go through. Even the dividends to the shareholders are managed to be taxed twice, limiting their profits.
- Government Regulations - A corporation isn't as free as a sole proprietorship nor a partnership due to all the government involvement with the business. They have to get a charter approved as well as provide specific reports to the government about how the company is going.
- Stockholders - Having a large amount of stockholders manages to become a problem later on since every one of them must be informed on corporate matter and other proceedings. Letters and reports must be sent a lot, as well as when a share is sold there must be detailed records kept.
- Charter - The purpose that the corporation initially placed on the charter is the only thing the business can do. If the company wishes to do something else, they must go through making a new charter.
- Agency Dilemma - When an agent pursues their own interest over their employers. So the board must make sure managers and other employees perform their duties for the benefit of the corporation and its stockholders.