Corporations

A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is called a corporation. Unlike sole proprietorships and partnerships, a corporation’s legal status and obligations exist independently of its owners. Corporations are typically owned by many individuals and organizations who own shares of the business, called stock (thus, corporate owners are called shareholders or stockholders).

Stockholders can buy, sell, give or receive as gifts, or inherit their shares of stock. Because ownership can be transferred without dissolving the corporation, corporations have an unlimited life span. The holders of the shares enjoy limited liability. They are not personally liable for the debts of the corporate entity.

As a legal entity, a corporation has many of the rights, duties, and powers of a person, including the right to conduct business, to own and sell property, to borrow money, and to sue or be sued.

In a corporation, ownership and management are separate. The shareholders elect the board of directors, who in turn elect the officers of the corporation. The corporate officers carry out the policies and decisions of the board. In practice, the center of power in a corporation often lies with the chief executive officer, or CEO. The CEO and other members of top management, such as the chief operating officer (COO), chief information officer (CIO), and chief financial officer (CFO), make most major corporate decisions.

Stockholders’ role in the corporation depends on the class of stock they own. Shares are usually classified as common or preferred stock. Owners of preferred stock do not have a vote, but they receive dividends before common stockholders. Owners of common stock have voting rights but they are last to receive any income distributions (dividends). Since one share is typically worth only one vote, small stockholders generally have little influence on corporate management actions.

No other form of business ownership can match the success of the corporation in bringing together money, resources, and talent: in accumulating assets; and in creating wealth. The larger a corporation becomes, the more sources of financing are available to it. As they grow, corporations can benefit from the diverse talents and experience of a large pool of employees and managers. While the combined number of proprietorships and partnerships in the United States is four times the number of corporations, the profits earned by corporations are more than two times greater. Corporations account for 70 percent of the profits earned by U.S. businesses.

Corporations are the most complex and expensive form of business to organize. Much paperwork and high costs are associated with incorporation. Corporations are closely regulated by the government. Keeping trade secrets is difficult because much financial information about the firm’s profits, sales, and debts, as well as descriptions of the company’s operations, products, and plans for the future must be disclosed to the public and to government agencies. Another disadvantage of corporations is the double taxation of business income. After a corporation pays federal, state, and local income taxes on its profits, its owners (stockholders) also pay personal taxes on their share of the company’s profits received as dividends.

Corporations have evolved into various types. The first distinction is whether a company is public or private. The exhibit below shows major types of corporations. The most visible corporations are the large, private ones, such as General Motors, IBM, and Coca-Cola, but other types are also common.

TYPE	DEFINITION	EXAMPLE
Government-owned corporation	Business formed by federal or state government for a specific public purpose	Local school districts; TVA (an electric utility)
Quasi-government corporation	Public utility with a monopoly on providing basic public services	Electricity, water, natural gas, local phone service; the U.S. Postal Service
Private corporation	Business owned by private individuals or companies	General Motors; Levi Strauss &Company;
Non-profit corporation	Charitable, educational, and fraternal organizations; arts institutions	Harvard University; The American Red Cross; New York’s Metropolitan Museum of Art
For-profit corporation	Company in business to make a profit	IBM; Procter & Gamble
S corporation	Corporation with no more than 75 owners, whose profits are taxed at personal income-tax rates; a cross between a partnership and a corporation	Inland Asphalt; Accounting Systems
Limited liability company (LLC)	Companies that combine the benefits of S corporations and limited partnerships; an LLC’s existence is restricted to 30 years	Segway Human Transporter; Realatech
Parent company	Company that owns most, if not all, of another company’s stock and that takes an active part in managing that other company	General Electric; supervises the operations of 27 subsidiaries
Holding company	Company that owns most, if not all, of another company’s stock but that does not actively participate in the management of that other company	Intermark
Subsidiary corporation	Corporation that is entirely, or almost entirely, owned by another corporation, known as a parent company or holding company	Taco Bell, a subsidiary of PepsiCo

Exhibit 3.1

Major Types of Corporations