Corporations

What is Corporations?

Corporation is a business that is a legal entity separate from its owners. Some industries, such as automobile manufacturing, computer manufacturing, oil refining, and natural gas production, require millions of dollars to operate a business. Typically such vast sums of money are put together by attracting numerous investors. The unincorporated forms of business – the proprietorship and the partnership – do not attract investors who do not want to make decisions or to be actually involved in managing the firm. The corporation, by contrast, provides a form of business ownership in which owners spread over a wide geographical area can hire professional managers to operate the business. In the eyes of the law, the corporation is an artificial being, invisible and intangible. It has the legal rights of an individual: it can own property, purchase goods and services, and sue other persons or corporations.



Forming a Corporation:

The legal status of a corporation stems from a charter, which is a state issued document authorizing its formation. The individuals forming the corporation are called its incorporators. A corporation that conducts business in the state in which it is chartered is known as a domestic corporation. A corporation doing business in a state other than the one in which it is incorporated is called a foreign corporation.

Most states require that at least three persons join together to form a corporation. The applicants fill out an application form for a charter (articles of incorporation); the form is then reviewed by the appropriate government officials. After the charter has been granted, the incorporators and all subscribers or the owners of the stock of the business meet and elect a board of directors. They also approve the bylaws of the corporation, if this is a state requirement. The board of directors then meets to select the professional managers and to make any other decisions needed to start the business.

The corporation has relationships with various groups. Included in the corporation’s domain of operation are shareholder, creditors, customers, and employees. The actual owners of the business are the shareholders, those who have invested their money. The corporation is run by professional managers who plan, organize, control, and direct the activities needed to sell goods and services to customers.

Types of Corporation:

In reality, corporations come in many sizes and types.

  • Private Corporation: Attempts to earn a satisfactory profit.
  • Public Corporation: Owned and run by the government.
  • Closed Corporation: Stock held by only a few owners and not actively sold on the stock market.
  • Open Corporation: Stock held by numerous people and actively sold on the stock market.
  • Municipal Corporation: Cities and townships that carry out business.
  • Domestic Corporation: Incorporated in one states or country and doing business within that state or country.
  • Foreign Corporation: Incorporated in one state or country and doing business in another state or country.
  • Alien Corporation: Incorporated in one nation and operating in another nation.
  • Non-profit Corporation: Service organization incorporated for limited liability status.
  • Single Individual Corporation: Individually owned business incorporated to escape high personal income tax rate.

Corporations come in many sizes and types. Many universities and religious organizations are nonprofit corporations. They are not profit seeking enterprises.

Corporate Policymakers:

A corporation’s policy is established by a board of directors, which is elected by the shareholders, or owners. Directors are assumed to be free to make their own judgments on all matters presented to them. The directors do not make judgments for a single group of owners – they make judgments in the best interest of all owners. Thus they are usually elected for their business ability. A growing number of shareholders are challenging the abilities and performance of board members. The business action discusses how serious the performance of the board is for owners. 

Directors are elected by the shareholders. Each share of common stock entitles the shareholder to one vote. In many cases, shareholders vote by proxy. A proxy is a written statement, signed by the shareholder, allowing someone else to cast his or her number of votes. The proxy permits a director to cast the votes.

Other Incorporated Forms of Business:   

The corporation is certainly the dominant form of incorporated ownership. Below mentioned four incorporated list:

  1. S Corporations
  2. Cooperatives
  3. Savings and Loan Associations
  4. Professional Service Associations

S Corporations:

This corporation is with 35 or fewer owners that file an income tax return as a partnership to take advantage of lower tax rate. To qualify as an S corporation, a business must meet the following requirements:

  • It must be incorporated within the United States
  • All shareholders must be residents of the United States.
  • Shareholders must be natural persons, estates, or trusts.
  • No shareholder can be a partnership or a corporation
  • There cannot be more than 35 shareholders.

S corporation has primary advantage is that; the shareholders tax brackets can result in tax savings. If a corporation expects to lose money in the first years of operation and if the shareholders will have income from other sources, the S corporation is preferred.

The primary disadvantage is that; the tax law governing the S corporation is very complex. Tax and legal advice is strongly recommended before and after making the S corporation choice. The best time to terminate S status is when the S corporation begins to produce very high levels of taxable income.

Cooperatives:

Cooperatives an organization in which a group of people collectively own and operate all or part of the business is a cooperative (co-op). More than 5500 producer co-ops do business in the US.

Dividends are paid to co-op members in proportion to the amount of goods that each member has bought or sold through the cooperative. A disadvantage of co-ops is that as they grow larger they become more visible to the public, and if the public questions their market power, they may lose their special status under the law.

Savings and Loan Associations:

This corporation is that operate in much the same manner as savings bank. The owner of an account is given a passbook in which deposits and withdraw are noted.

Professional Service Associations:

This is an organization of professional people, organized under professional association laws and treated as a corporation for tax purpose. The professional services of doctors, lawyers, dentists, and individuals are not by corporations. Impersonal corporate entities were not allowed to provide personal care services.

Advantages of a Corporation:

  • Limited Liability
  • Skilled Management Team
  • Transfer of Ownership
  • Greater Capital Base
  • Stability
  • Legal Entity Status

Limited Liability:

A person investing funds in a corporation receives shares of stock and becomes an owner. In a corporation, the liability for the shareholder equals the amount of funds invested. Thus, if the business is forced to liquidate, each owner loses only the amount of money he has invested.

Skilled Management Team:

The board of directors has the duty of hiring professional managers, and the owners delegate their power of operating the business to these managers. Professional managers are trained and experienced career executives.

Transfer of Ownership:

Shareholder have right to sell their shares of a corporation’s stock to whomever they please, barring a legal restriction on some closed corporations.

Greater Capital Base:

The size of a proprietorship or partnership is limited to the amount of capital that one or several people have available and is willing to invest.

Stability:

A corporation can usually be chartered to operate indefinitely. Shareholder deaths, retirement, or sale of stock need not dissolve the business.

Legal Entity Status:

A corporation can purchase property, make contracts, or sue and be sued in its corporate name. These characteristics distinguish it most clearly from other forms of business organization.

Disadvantages of a Corporation:

  • Difficulty of Starting
  • Lack of Control
  • Multiple Taxation
  • Government Involvement
  • Lack of Secrecy
  • Lack of Personal Interest
  • Credit Limitations

Difficulty of Starting:

Starting a corporation involves applying for a charter from a state. Each state has its own set of laws; these must be considered before deciding where to incorporate.

Lack of Control:

The individual shareholder has little control over the operations of the corporation except to vote for a slate of individuals for the board of directors. 

Multiple Taxation:

In addition to an annual franchise tax in the state of incorporation, an annual payment is required by most states for the right to operate as a corporation. Multiple or double taxation is taxing a corporate owner’s money twice by taxing it as income of corporation and as dividends of the individual owner.

Government Involvement:

State and federal governments have the right by law to exercise certain controls on, and to require certain reports from, businesses.

Lack of Secrecy:

A corporation must provide each shareholder with an annual report.

Lack of Personal Interest:

In most corporations except the small ones, management and ownership are separate. This separation can result in a lack of personal interest in the success of the corporation.

Credit Limitations:

Banks and other lenders have to consider the limited liability of corporations. If a corporation fails, its creditors can look only to the assets of the business to satisfy claims.

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