Corporations

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 locate to act as a single person separate from its owners. Corporations are generally large in size and play a powerful role in countries. To get permission to form a corporation organizers must obtain a charter. A charter is an official document through which a state grants the power to operate as a corporation. Acts performed by authorized people are done in the name of the business not in the name of the individual person.

Important People in a Corporation

Stockholders are the owners of the business. When a person buys a share of the company they become a stockholder, or shareholder. This means they own the part of the business they bought a stock, or share for. They have the right to transfer ownership, vote for members of the ruling body, receive dividends, or profit, and share net proceeds.


The board of directors is the ruling body of the corporation. They are elected by the stockholders. The board oversights responsibilities and appoints officer to carry out the plans of the corporation. If the corporation begins to lose profit the board can step in and play an active role in operational management of a business. The board generally consists of 10 to 25 directors. People that are elected to the board usually have valuable knowledge needed by the board to make sound decisions.


Officers are the top executives and are hired to manage the business. They are appointed by the board of directors. The officers consist of a president, secretary, and treasurer. Some large corporations also have vice presidents in charge of areas such as marketing, finance, and manufacturing.

Close and Open Corporations

Close corporation is a corporation in which the stock for the business is not made for public sale. A close corporation does not have to make its financial activities known to the public, but it does have to file a tax report.


An open corporation is a corporation in which the stock for the business is made available for public sale. These are advertised through the newspaper or different websites. Open corporations have to have a prospectus. A prospectus is a formal summary of the chief features of the business and its stock offering.

Formation of Corporations

There is no federal laws on forming corporations but each state does have its own laws. A business is usually required to have a name that indicates a corporation has been formed. They have names such as: corporation, corp., Incorporated or inc. The corporation has to fill out a certificate of incorporation which requires a corporation to describe its purpose clearly. This certificate cannot be completed until the investment partnership is decided upon. New corporations must pay an organization tax based on the amount of its capital stock. New corporations also pay a filling fee before the state will issue a charter entitling the business to operate as a corporation.

Operating a New Corporation

The first step to organizing a new corporation is to prepare a balance sheet showing how money is spent. Also, the people starting the corporation need to have a contract showing the voting rights. Some stockholders agree they receive a vote for every stock they own but others determine a percentage of vote each person owns. Every person that owns a stock must receive a notice about stockholder meetings even if they only own one stock.

Management Issues for Corporations

Sources of Capital- A corporation can obtain money from several sources and usually find borrowing large sums of money easier than a proprietorship or partnership.


Limited Liability- In a corporation the owners, directors, and managers are not legally liable for the debt of the corporation beyond their investment in the stocks.


Permanency of Existence- A corporation is a more permanent business type than proprietorship and partnerships. Directors and managers can change over time without affecting the operation or ownership of a corporation.


Ease in Transferring Ownership- It is easy to transfer ownership of a corporation because whenever a stock is sold the person buying the stock receives a certificate saying hey own a certain part of the business.


Taxation- A corporation is subject to more taxes than a proprietorship or partnership. They pay a filing fee, organization tax, and an annual state tax.


Government Regulations- Corporations cannot be started and ran however you please. You have to have a charter to start a corporation. There are also state rules and regulations limiting what type of business activities you can do. the federal government requires firms whose stock is publicly traded publish financial data.


Stockholders' Records- All stockholders must be informed on corporate matters, notified of meetings, and given the right to vote no matter how few stocks they own.


Charter Restrictions- A corporation can only engage in activities that are listed on its charter. They cannot change what they sell without getting government approval.


Agency Dilemma- An agency dilemma is whenever an agent looks for their own interests instead of their employers. Managers in a company may think about what is best for them but not for the various stockholders of the corporation.

Corporation Examples