Basic Features and Structures of Corporations

First, a corporation is a business owned by a group of people and is authorized by the state in which it is located to at as though it were a single person, separate from its owners. Corporations are generally few in number but large in size. In order to get permission to form a corporation there must first be a charter. A charter is the official document through which a state grants the power to operate as a corporation. Think of a corporation as an artificial person. This "person" can make contracts, borrow money, own property, and sue or be sued in its own name. Everything done for the business is in the name of the business.

Examples of Corporations

3 Key Types of People in Corporations


Stockholders have a number of basic rights within the corporation. They have the right to:

  • Transfer ownership to others
  • Vote for members of the board of directors and special matters
  • Receive dividends
  • Buy new shares of stock in proportion to on'es present investment should the corporation issues more shares
  • Share in the net proceeds should the corporation go out of business.

They don't have the same financial liability as a partner would. There is no liability beyond the extent of the stockholder's ownership. If the corporation fails a stockholder can lose only the money they invested.


Within a corporation there is a board of directors. The board of directors are elected by the stockholders. The directors have the management oversight responsibilities to develop plans and policies to guide the corporation as well as appoint officers to carry out plans. Usually a board of directors consists of 10-25 directors.


Officers are directed by the board of directors. In a corporation the typical officer jobs include a president, secretary, and treasurer. Some corporations may additionally have a vice president in charge of certain areas. Most of the time the titles of these officers are shortened such as CEO(chief executive officer) or CFO(chief financial officer).

Close and Open Corporations

Close Corporation

A closed corporation is a corporation that doesn't offer its shares of stock for public sale. A close corporation does not need to make its financial activities known to the public. Its stock is not offered for general sale.

Open Corporation

An open corporation is a corporation that offers its shares of stock for public sale. In order to do so the corporation must file a registration statement with the SEC containing extensive details about the corporation and the proposed issue of stock. A shorter version of this is a prospectus which is a formal summary of the chief features of the business and its stock offering.

Forming a Corporation: Step by Step

First, a series of management decisions have to be made about how the corporation will be organized. Second, the proper legal forms have to be prepared and sent to the state office that handled such matters. Third, the state has to review the incorporation papers and issue a charter if approved.

Certificate of Incorporation

Most states it is necessary to file a certificate of incorporation. This certificate of incorporation requires basic information about the business such as firm name, purpose, capital stock, information about the organizers, etc,.

Naming The Business:

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

Stating The Purpose Of The Business:

The certificate of incorporation requires a business to describe its purpose clearly. This is so that a corporation can do what it's supposed to do and nothing else unless a request is made and approved.

Investing In The Business:

The certificate of incorporation cannot be completed until you decide how to invest your partnership holdings in the corporation.

Paying Incorporation Costs:

New corporations must pay an organization tax that is based on the amount of capital stock. Also, a new corporation pays a filling fee before the state will issue a charter entitling the business to operate as a corporation.

Advantages and Disadvantages


  • Can obtain money from several sources
  • Borrowing large sums of money less of a problem than in proprietorships or partnerships
  • Stockholders, directors, and managers are not legally liable for the debts of the corporation beyond their investment in the stock shares purchased
  • The death or withdrawal of and owner doesn't affect the corporation's life, it can continue to operate indefinitely or as long as the term stated in the charter
  • Very easy to transfer ownership


  • Subject to more taxes than are imposed on the proprietorship and partnership
  • Profits distributed to stockholders are dividends taxed twice
  • Cannot do business wherever it pleases. If the corporation wants to conduct business in other states then each state will most likely require the corporation to obtain a license and pay a fee to do business in that state
  • Corporations with many stockholders have added problems and expenses in communicating with stockholders and in handling stockholder's records
  • Keeping records for thousands of stockholders is time-consuming and costly
  • Only allowed to engage in those activities stated in the charter
  • Agency dilemma: when an agent, or someone who works for another, pursues their own interest over their employers