CHAPTER

OBJECTIVESOBJECTIVES

CORPORATE FORMS OF BUSINESS OWNERSHIP

Explain the basic features of a corporation. Describe how a corporation is formed and organized. List some of the major advantages and disadvantages of the

corporate form of business. Describe several specialized forms of business

organizations.

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Corporations

17% of all businesses (87% of all sales) Few in number, but generally large in size Corporate sales were over 17x more than sales from SP and

over 16x more than partnerships Examples: Ford and K-Mart Legal entity in and of itself

Treated independently of its owners The corp. (NOT the owners) pay taxes, make

contracts, borrow money, own property, and is held liable (can sue or be sued)

Survive the death of its owner(s)

BASIC FEATURESOF CORPORATIONS Corporation

Business owned by a group of people and authorized by the state in which it is located to act as though it were a single person, separate from its owners

An artificial person created by the laws of the state (legal rights similar to those of individuals – make contracts, own property, sue and be sued)

Charter (Certificate of Incorporation) – the official

document through which a state grants the power to operate as a corporation

3 key types of people in a corporation:

1. Stockholders (shareholder) The owners of a corporation Shares – Equal parts of the division of

ownership of a corporation2. Directors (BOD)

The ruling body of the corporation Elected by the stockholders Develop plans and policies to guide the corp as well

as appoint officers to carry out the plan Generally consists of 10-25 directors (top exectives,

executives from other corp (college prof), or stockholders with many shares)

3 key types of people in a corporation:

3. Officers The top executives who are hired to

manage the business BOD appoints them CEO (Chief Executive Officer) – top

officer CFO (Chief Financial Officer) – financial

officer

Stockholder

Ownership is in the form of stocks Share of Stock – unit of ownership in a

corporation Shareholder/stockholder A person who buys one share becomes a

stockholder Stockholders are NOT liable for the debts of

the corp. and can only lose the money they have invested No liability beyond the extent of the stockholder’s

ownership

Stockholders basic rights:

1. To transfer ownership to others2. To vote for members of the ruling body of the corporation and

other special matters that may be brought before the stockholders

3. To receive dividends (the decision to distribute profits is made by the ruling body) Profits that are distributed to stockholders on a per-share basis

4. To buy new shares of stock in a proportion to one’s present investment should the corporation issue more shares

5. To share in the net proceeds (cash received from the sale of all assets less the payment of debts) should the corporation go out of business

Corporations

Board of Directors (BOD): BOD are elected Group of people who meet several times a year Make important decisions affecting the co. Elect senior officers & determine their salaries Set the corp. rules & regulations Decides how much the co. will pay in dividends Any shareholder has the right to attend meetings and vote

Dividends – distributions of profits to shareholders by the corp.

The officers NOT the BOD are responsible for the day-to-day management

FORMATION OF CORPORATIONS

Preparing the certificate of incorporation (each state has their own laws – no federal law exists) Domestic corp. – file in the state in which you plan to

conduct business Foreign corp. – charted in another state other than in the

one they are conducting business Naming the business – usually required by law to

indicate that a corp has been formed (Corporation, Corp., Incorporated, or Inc.)

Stating the purpose of the business – description of its purpose (“to operate a retail food service”)

Investing in the business Capital Stock – the general term applies to the shares of

ownership of a corporation Paying incorporation costs – must pay an

organization tax, based on the amount of its capital stock

FORMATION OF CORPORATIONS

Operating the new corporation Getting organized

Prepare a balance sheet or statement of financial position

Handling voting rights Must send each stakeholder notices of all

stockholders’ meetings to be held Proxy – written authorization for someone to

vote on behalf of the person signing the proxy

York 2,217 shares x $100 per share = $221,700

Burton 2,217 shares x $100 per share = $221,700

Chan 2,217 shares x $100 per share = $221,700

Total $665,100

Did York, Burton, and Chan purchase all of the capital stock available? No, there were 10,000 shares

available at $100 each

AssetsClaims Against

AssetsCash $ 240,000 Accounts

Payable (Liabilities

$ 74,900

Merchandise 60,000 Capital Stock 665,100

Equipment 90,000

Land & Building

350,000

Total $740,000 Total $740,000

Assets = Liabilities + Capital

Handling Voting Rights

Stockholders usually have one vote for each share owned

How many votes does Burton, Chan, and York each have? 2,217 (6,651 total)

Over 50% of the total votes What if Chan sold 1,200 of his votes to Burton?

Burton would have 3,417 votes (2,217 + 1,200) Burton would have more than 50% of the total 6,651

shares of stock that have been issued Burton could control the corporation (York and Chan would

lose if Burton voted differently from them on an important issue)

Corporate Voting Example

Value per share: $200

Stockholder Shares Votes?

Smith 580 _____

Jones 170 _____

Watson 800 _____

STOCKHOLDERSOwners who elect board members

BOARD OF DIRECTORSSelects officers and

makes major policy decisions

PRESIDENTJennifer L. York

May also be called CEOand may be elected chair of the BOD

VICE PRESIDENTRobert. R. Burton

SECRETARY & TREASURERLu Chan

Close and open corporations

Close corporation Also called closely held corporation Does not offer shares of stock for public sale Just a few stockholders own it

Open corporation Also called publicly owned corporation Offers shares of stock for public sale Large number of stockholders Prospectus – a formal summary of the chief features of the business

and its stock offering Must be furnished to each prospective buyer of newly offered

stocks (or bonds)

Corporation - Advantages

Advantages – Limited liability

Limited to the amount invested in stock

Ability to raise capital Continuity of business Transferable ownership

Corporation - DisadvantagesDisadvantages – Double taxation

Entity pays taxes on income earned Shareholder pays taxes on dividends Employees pay income tax

Charter costs/restrictions Government regulations/filings Cost more to create

Incorporate – set a business up as a corp. (expensive!) Detail the purpose of the business

Do not benefit from losses Must be applied against future profits

Stockholders’ Records Letters and reports must be sent regularly

What is the main benefit of setting up your business as a corporation?

Reduced liability

Businesses suited to being corporations

Businesses that require large amounts of capital (airlines, hotels and auto manufacturers)

Businesses that may have an uncertain future (amusement parks) With an uncertain future it adds to the

financial risk

Organized as a corporation?

Vitamins? No

Native American Jewelry? Yes

Sneakers? No

Collector Coins? Yes

S-Corporation AKA Limited Liability Corporation (LLC) Similar to a corp. but income is taxed like a

partnership Corp. does NOT pay taxes on its profits Individual shareholders are taxed on their

profits Losses may be used as a deduction up to

the amount invested

Why might a business become an S-corp? Lower taxes and limited liability

S-Corp Criteria

1. No more than 35 shareholders

2. The business cannot own 80% or more of the stock of another corporation

3. Not more than 25% of the income of the corp can be from sources other than for the purpose(s) stated in the charter

4. Shareholders must be US citizens or residents

Feature Sole

Proprietorship

Partnership Corporation S - Corp

(LLC)

Simple to start √ √Decisions made by one person √Low initial cost √Limited liability √ √Limited government regulation

√ √

Ability to raise capital √ √Double taxation of profits √

Issues Sole

Proprietorship

Partnership Corporation

# of owners 1 No limit No limit

Start-up costs Fees for DBA and license

Fees fro DBA and agreement

Attorney fees for incorp. Documents and filing fees

Liability Owner liable Partners liable s/h liable to amount of investment

Life of business Death of owner Death or separation of partner unless otherwise notes

No effect

Transfer of interest

Owner free to sell

Requires consent s/h free to sell

Distribution of profits

Profits go to owner

Profits shared based on agreement

Paid to s/h as dividends

Management control

Owner has fullcontrol

According to agreement

BOD who are appointed by s/h’s

SPECIALIZED TYPESOF ORGANIZATIONS Joint ventures

An agreement among two or more businesses to work together to provide a good or service Legal formation is not important Each partner is expected to bring management

expertise or money to the venture Must be able to adapt quickly to compete effectively

Virtual Corporation – a network of companies that form alliances among themselves as needed to take advantage of fast-changing market conditions

Puma is a great example Over 80 companies worldwide participate in

making and selling the shoes

SPECIALIZED TYPESOF ORGANIZATIONS

Limited liability companies (S-Corp) Nonprofit corporations

An organization that does not pay taxes and does not exist to make a profit Organizations that manage cities or schools United Way, SAT, private schools and universities

Quasi-public corporations A business that is important, but lacks the profit potential to attract

private investors, and is often operated by local, state, or federal government Water and sewer systems or interstate highways (turnpike)

Cooperatives A business owned and operated by its user-members for the

purpose of supplying themselves with goods and services Popular for buying and selling crops (agriculture) Credit unions, insurance firms, apartments

Raed Tihs

It deosn’t mttaer what oredr the ltteers in a word are, the olny iprmoetnt tihng is that the frist and lsat ltteer be at the rghit pclae.

The rset can be a total mses and you can still raed it wouthit porbelm.

This is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the word as a wlohe.