By Daniela Gamez

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 a though it were a single person, separate from its owners.

In order to form a corporation, one needs to obtain a charter which is also called a certificate of incorporation and is the official document which a state grants the power to operate as a corporation

Facts About Corporations

-few in numbers but usually large in size

-employ millions of people

-have many layers of management

-provide consumers with many of the goods and services they use daily

-can make contracts, borrow money, own property, and sue or be sued in its own name

Three Key Types of People in Corporations

1. Stockholders

They are essentially the owners of a corporation except the ownership is divided into shares

They are allowed to

-Transfer ownership to others

-Vote for board of directions and on other special matters that may be brought before the stockholders

-Receive dividends, or profits that are distributed to stockholders

-Buy new shares of stock

-Share in the net proceeds if the corporation were to go out of business

A stockholder can only lose the money invested meaning that creditors can't collect anything further unlike what can happen in proprietorships and partnerships

2. Directors (Board of directors)

Directors are the ruling body of the corporation that are elected by stockholders

They are allowed to

-develop plans and policies to guide the corporation

-appoint officers to carry out the plans

In large firms there are generally 10-25 directors

3. Officers

Officers are the top executives hired by board of directors to manage the business

A small corporation may include a president, secretary, and a treasurer while a large corporation may include those and vice presidents in charge of major areas, such as manufacturing or marketing

Close and Open Corporations

Close corporation: Corporation that does not offer its share of stocks for public sale

-does not need to make its financial activities known to the public

-must prepare reports for the state it obtained its charter from

-must prepare reports for tax purposes for all states it operates in

Open corporation: Corporation that does offer its share of stocks for public sale

-must file registration statement with the Securities and Exchange Commission (SEC) containing extensive details about the corporation and purposed issue of stock

-prospectus, a formal summary of the chief features of the business and its stock offering, must be furnished to each prospective buyer of newly offered stocks

Formation of Corporations

No federal law exists

Certificate of incorporation calls for basic information about the business, which includes firm name, purpose, capital stock, and information about the organizers

Business is usually required by law to have a name that clearly shows that a corporation has been formed

Certificate of incorporation cannot be completed until organizers decide how to invest in a corporation

New organization must pay an organization tax, based on amount of ts capital stock

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Operating a New Corporation

Must send each stockholder notices of all meetings held for stockholders

-if a stockholder cannot attend the meetings personally, they must be represented through a proxy (written authorization for someone to vote on behalf of the person signing the proxy) which can be submitted through the internet, phone, or mail

Management Issues for Corporations

Corporations can obtain money from several sources

Owners, directors, and managers are not legally liable for the debts of the corporation beyond their investment in stock shares purchased

Corporations are more permanent and can continue to operate indefinitely as the term stated in the charter

-death will not stop a corporation

Easy to transfer ownership

Corporation subject to more taxes than are imposed on proprietorships and partnerships

-profits distributed to stockholders are dividends are taxed twice

To form a corporation, an application for a charter must be submitted to the appropriate state official which is going to be most likely the secretary of state

Federal government requires firms whose stock is publicly traded to publish financial data which results in corporations having a greater need for detailed financial records and reports

Restricted by charter meaning that corporations are only allowed to engage in activities stated in the charter

An agency dilemma can occur when an agent, or someone who works for another, pursues their own interest over their employers

-corporate boards must ensure that manager perform their duties for the benefit of the corporation owners, the stockholders

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