Corporation
Corporation is an
artificial person created by law, with most of the legal rights of a real
person. These include the right to start and operate a business, to own or
dispose of property, to borrow money, to sue or be sued, and to enter into
binding contracts. Unlike a real person, however, a corporation exists only on
paper.
There are more than 3.2 million
corporations in the United States. They comprise only about one-fifth of all
businesses, but they account for more than nine-tenths of all sales revenues
and more than three-quarters of all business profits.
Corporate ownership: The shares
of ownership of a corporation are called its stock. The people who own a
corporation's stock—and thus own part of the corporation— are called its stockholders,
or sometimes its shareholders. Once a corporation has been formed,
it may sell its stock to individuals. It may also issue stock as a reward to
key employees in return for certain services, or as a return to investors (in
place of cash payments).
A close
(private) corporation is a corporation whose stock is owned by relatively
few people and is not traded openly (that is, in stock markets). A person who
wishes to sell the stock of such a corporation generally arranges to sell it
privately, to another stockholder or a close acquaintance.
An open
(public) corporation is one whose stock is traded openly in stock markets
and can be purchased by any individual. Most large firms are open corporations,
and their stockholders may number in the millions. For example, AT&T is
owned by more than 3 million shareholders.
Forming a corporation
The process of forming a
corporation is called incorporation. The people
who actually start the corporation are its incorporators.
They must make several decisions about the corporation before and
during the incorporation process.
Where to Incorporate A business
is allowed to incorporate in any state it chooses. Most small and medium-sized
businesses are incorporated in the state where they do the most business.
However, the founders of larger corporations, or of those that will do business
nationwide, may compare the benefits provided to coiporations by various
states. Some states are more hospitable than others, and some offer low taxes
and other benefits to attract new firms. Delaware is acknowledged as offering
the most lenient tax structure. A huge number of firms (more than 75,000) have
incorporated in that state, even though their corporate headquarters may be
located in another state.
An incorporated business is
called a domestic corporation in the state in which it is incorporated. In all other
states where it does business, it is called a foreign corporation. Scars,
Roebuck, for example, is incorporated in New York, where it is a domestic
corporation. In the remaining forty-nine states, it is a foreign corporation. A
corporation chartered by a foreign government and conducting business in the
United States is an alien corporation. Volkswagen, Sony, and Toyota are
examples of alien corporations.
The Corporate Charter Once a
"home state" has been chosen, the incorporators submit articles of
incorporation to the secretary of state. If the articles of
incorporation are approved, they become the firm's corporate charter. A
corporate charter is a contract between the corporation and the state, in which
the state recognizes the formation of the artificial person that is the
corporation. Usually the charter (and thus the articles ofincorporation)
includes the following information:
Firm's name and address
-
The incorporators' names and
addresses The purpose of the corporation
-
The maximum amount of stock and
the types of stock to be issued The rights and privileges of shareholders
-
How long the corporation is to
exist (usually without limit)
Each of
these key details is the result of decisions that the incorporators must make
as they organize the firm—before the articles of incorporation are submitted.
Let us look at one area in particular: stockholders' rights.
Stockholders' Rights There are
two basic kinds of stock. Each type entitles the owner to a different set of
rights and privileges. The owners of common stock may vote on corporate
matters, but their claims on profit and assets are subordinate to the claims of
others. All common stock owners receive dividends but the amount of these
dividends depends on the profitability of the company. The owners of preferred
stock usually do not have voting rights, but their claims on profit and assets
take precedence over those of common-stock owners. Preferred stock often pays a
lower profit return than common stock dividends but that return is fixed and
guaranteed.
Perhaps the most important right
of owners of both common and preferred stock is to share in the profit earned
by the corporation. Other rights include pre-emptive rights - the rights
of current stockholders to purchase any new stock that the corporation issues
before it is sold to the general public; examining corporate records; voting on
the corporate charter; and attending the corporation's annual stockholders'
meeting, where they may exercise their right to vote.
Because
common stockholders usually live all over the nation, very few actually attend
the annual meeting. Instead, they vote by proxy. A proxy is a legal form that
lists issues to be decided and requests that stockholders transfer their voting
rights to some other individual or individuals. The stockholder registers his
or her vote and transfers his or her voting rights simply by signing and
returning the form.
Organizational
Meeting As the last step in forming a corporation, the original
stockholders meet to elect their first board of directors. (Later, directors
will be elected or reelected at the corporation's annual meetings.) The board
members are directly responsible to the stockholders for the way they operate
the firm.
Corporate structure
Board of Directors The board of
directors is the top governing body of a corporation, and, as we noted,
directors are elected by the shareholders. A corporation is an artificial
person. Thus it can act only through its directors, who represent the
corporation's owners. Board members can be chosen from within the corporation
or from outside it.
Directors who are elected from
within the corporation are usually its top managers—the president and executive
vice presidents, for example. Those who are elected from outside the
corporation are generally experienced managers with proven leadership ability
and/or specific
%
talents that
the organization seems to need. In smaller corporations, majority stockholders
may also serve as board members.
The major responsibilities of the board of
directors are to set company goals and develop general plans (or strategies)
for meeting those goals. They are also responsible for the overall operation of
the firm.
Corporate
Officers A corporate officer is appointed
by the board of directors. The chairman of the board, president, executive vice
presidents, and corporate secretary and treasurer are all corporate officers.
They help the board make plans, carry out the strategies established by the
board, and manage day-to-day business activities. Periodically (usually each
month), they report to the board of directors. And once each year, at an annual
meeting, the directors report to the stockholders. In theory, then, the
stockholders are able to control the activities of the entire corporation
through its directors.
Advantages
Limited
Liability One of the most attractive features of corporate ownership is
limited liability. Each owner's financial liability is limited to the amount of
money she or he has paid for the corporation's stock. This feature arises from
the fact that the corporation is itself a legal being, separate from its
owners. If a corporation should fail, creditors have a claim only on the assets
of the corporation, not on the personal assets of its owners.
Ease of
Transfer of Ownership Let us say that a shareholder of
a public corporation wishes to sell his or her stock. A telephone call to a
stockbroker is all that is required to put the stock up for sale. There are
usually willing buyers available for most stocks, at the market price.
Ownership is transferred automatically when the sale is made, and practically
no restrictions apply to the sale and purchase of stock.
Ease of
Raising Capital The corporation is by far the most effective
form of business ownership for raising capital. Like sole proprietorships and
partnerships, corporations can borrow from lending institutions. However, they
can also sell stock to raise additional sums of money. Individuals are more
willing to invest in corporations than in other forms of business because of
the limited liability that investors enjoy and because of the ease with which
they can sell their stock.
Perpetual
Life Because a corporation is essentially a legal "person,"
it exists independently of its owners and survives them. Unless its charter
specifies otherwise, a corporation has perpetual life. The withdrawal, death,
or incompetence of a key executive or owner is not cause for the corporation to
be terminated. Sears, Roebuck, incorporated almost a century ago, is one of the
nation's largest retailing corporations, even though its original owners,
Richard Sears and Alvah Roebuck, have been dead for decades.
Specialized
Management Typically, corporations are able to recruit more skilled and
knowledgeable managers than proprietorships and partnerships. This is because
they have more available capital and are large enough to offer considerable
opportunity for advancement. Within the corporate structure, administration,
human resources, finance, sales, and operations are placed in the charge of
experts in these fields. For instance, the Bechtel Group hired Caspar
Weinberger, former Secretary of Defense.
Disadvantages of Corporations
Difficulty
and Expense of Formation Forming a corporation can be a
relatively complex and costly process. The use of an attorney may be necessary
to complete the legal forms and apply to the state for a charter. Charter fees,
attorney's fees, the costs of stock certificates and required record keeping,
and other organizational costs all add up. These payments can amount to
thousands of dollars for even a medium-sized corporation. The costs of
incorporating, in both time and money, discourage many owners of smaller
businesses from forming corporations.
Government
Regulation Most government regulation of business is directed at
corporations. A corporation must meet various government standards before it
can sell its stock to the public. Then it must file many reports on its
business operations and finances with local, slate, and federal governments. In
addition, the corporation must make periodic reports to its stockholders about
various aspects of the business. Also, its activities are restricted by law to
those spelled out in its charter.
Double
Taxation Unlike sole proprietorships and partnerships, corporations must
pay a tax on their profits. Then stockholders must pay a personal income tax on
profits received as dividends. As a result, corporate profits are taxed
twice—once as corporate income and again as the personal income of
stockholders.
Lack of Secrecy Because open corporations are
required to submit detailed reports to government agencies and to stockholders,
they cannot keep their operations confidential. Competitors can study these required
corporate reports and then use the information to compete more effectively. In
effect, every public corporation has to share some of its secrets with its
competitors.
