Large corporations: advantages and disadvantages

A corporation is a voluntary association of owners, known as stockholders, who form a business enterprise that is marked by limited liability. Although there are many small- and medium-size corporations, bigger business units are needed to perform certain services in the vast American economy. Large corporations can supply goods and services to a greater number of people across a wider geographic area than small businesses. They serve consumers across the nation and across the world. Corporate products tend to cost less because of the large volume and small overhead costs per unit sold. Moreover, consumers benefit from the availability of corporate "brand names," which they recognize as guaranteeing a certain level of quality wherever purchased.

Large corporations also have the financial strength to research, develop and produce new goods. Their scientific know-how, innovation and technical capability are critical to maintaining the nation's competitiveness and productivity.

In the United States, a corporation is a specific legal form of organization of persons and resources chartered by one of the 50 states for the purpose of conducting business. When people and resources are brought together to form a corporation, the result—in the eyes of the law—is a person. (Indeed, the Latin word corpus means "body" or "person.") A U.S. corporation, distinct from any individual human being, may own property, sue or be sued in court and make con­tracts. For this reason, a corporation is an ideal vehicle for the conduct of business by many smaller enterprises as well as larger ones.

The corporate form of business is a more flexible instrument for large-scale economic activity than the sole proprietorship or partnership.

First, because the corporation itself has legal standing, it safeguards its owners, relieving them of individual legal responsibility when they act as agents of the business.

Second, the owners of shares of stock have limited liability; they are not responsible for corporate debts. If a shareholder paid $100 for 10 shares of stock and the corpora­tion goes bankrupt, he or she can only lose the $100 invested.

Third, corporate stock is transferable. Thus, the corpo­ration is not damaged by the death or disinterest of a particu­lar person. An owner of stock can sell his or her holdings at any time or pass the stock along to heirs.

Yet the corporate business organization has drawbacks as well as benefits.

One disadvantage relates to taxation. As a separate legal entity, the corporation must pay taxes. Unlike the treat­ment of interest on bonds, dividends paid to shareholders are not a tax deductible business expense for the corporation.

When the corporation passes along profits to individuals in the form of dividends, the individuals are taxed again on these dividends. This is known as "double taxation".

Another cost results from the fact that ownership be­comes separated from management. While this makes man­agement easier, some managers are tempted to act more in their own interests than those of the stockholders.

Perhaps the most striking feature of the large corporation is its great number of shareholders (in effect, owners). A major company may be owned by a million or more people, many of whom own fewer than 100 shares. Typically, corporations directors and managers own less than 5 percent of the common stock. Blocks of stock often are owned or controlled by individuals, banks or retirement funds, but these holdings usually account for only a fraction of the total.

With shareholders living in all parts of the country, it is impossible for them to know all details about their business and to manage it wisely. In this situation, effective direct control is in the hands of the corporation’s board of directors.

Beyond making policy, the board places operational control in the hands of a chief executive officer (CEO). This person, who may be the chairman or president, usually supervises a number of vice presidents who manage various aspects of the corporation and report to the CEO. The chairman of the board is often an experienced executive who, together with the executive committee of the board, gives advice and approval to the president and many vice presidents. As long as the CEO has the confidence of the board of directors, he or she is permitted a great deal of freedom in the operation of the company.

The makeup and role of the board of directors varies from one company to another. Increasingly, only a minority of board members are internal officers of the corporation. Some directors are selected to give prestige to the board, others to provide certain skills or to present lending institutions.