Corporation

Before you read

Key terms

1. Mach up the words on the left with the definition on the right

corporation customer legal entity venture capital registrar stock exchange draft amendment payroll

a change proposed or made to a rule or a regulation a place where stocks are publicity bought or sold an organization that has legal right to make contracts and pay debts a person or a company whose duty is to keep records or registers a group of persons authorized to act as an individual for business purpose outline of something (usually in the form of rough notes) money invested in a possibly risky new business a person who buys things total amount of wages or salaries to be paid to employees

Thing ahead

Is there any similarity between a natural person and a corporation?

Texts 1.4 Read the text and answers the questions: How long has this form of business organisation been in existence? Why do people form limited companies? What types of corporation exist nowadays?

Synonym of Big Business

The most widely quoted definition of a corporation was made by US Chief Justice Marshall in 1819. He referred to a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of the law”. In other words, a corporation is an artificial being endowed by law with the rights, legal powers and duties of a natural person. An artificial person known as a corporation is created by law. Like natural persons, a corporation may own property, incur debts, and be sued for damages. Legally it is the corporation and not its stockholders or officers, that buys buildings and machinery, sells goods, borrows money and engages in lawsuits. Unlike natural persons, a corporation may not vote or be sent to jail. However, natural persons usually own a corporation. Natural persons determine and carry out its policies. But these natural persons do not directly own any of the corporation's property.

Corporation and its Relationship.

The corporation is not exactly a modern invention. In the Middle Ages, the corporate form was used by the Roman Catholic Church as a device to hold church property separate from any property held by individuals. As you already know, sole proprietors and partners, have unlimited liability for debts. If the business does badly and cannot pay its debts, any creditor can have it declared bankrupt. The unsuccessful business people may have to sell nearly all their possessions in order to pay their debts. This is why most people doing business form limited companies (corporations). A limited company is a legal entity separate from its owners and is only liable for the amount of capital that has been invested in it. If a limited company goes bankrupt, it is wound up and its assets are liquidated (i.e. sold) to pay the debts. If the assets do not cover the liabilities or the debts, they remain unpaid. The creditors simply do not get all their money back.

Most companies begin as private limited companies. Their owners have to put up the capital themselves, or borrow from friends or a bank, perhaps a bank specialising in venture capital. The founders have to write a Memorandum of Association (GB) or a Certificate of Incorporation (US), which states the company’s name, its purpose, its registered office or premises and the amount of authorised share capital. They also write Articles of Association (GB) or Bylaws (US), which set out the duties of directors and the rights of shareholders (GB) or stockholders (US). They send these documents to the registrar of companies.

A successful, growing company can apply to a stock exchange to become a public limited company (GB) or a listed company (US). Selling shares for the first time at the Stock Exchange is called Initial Public Offering (IPO) or floating a company (making a flotation). Publicly quoted companies have to fulfil a large number of requirements, including sending their stockholders an independently-audited report every year, which contains the year’s trading results and a statement of their financial position.

Corporations can have many structures, but the most typical corporation organisational structure consists of the board of directors, the officers, employees and the stockholders or owners. In larger corporations, each of these groups may involve many people. The primary responsibility of the board of directors is to protect stockholders’ investment. They are elected by the stockholders. Shareholders delegate power of management to the board of direct. The board of directors reports on the business's success and progress to the stockholders, normally via an annual or quarterly report. While not involved in the daily operations of the business, they set its mission and structure. The board of directors is responsible for drafting and amending the company and appointing committees as necessary. The directors, along with officers, are protected from the company’s liabilities. The board appoints the officers. The officers are the president or CEO (chief executive officer), the vice president, as well as a treasurer and secretary of the corporation. These people are appointed by and report to the board of directors. They are responsible for business operations. Their main responsibility is to act in the best interests of the corporation. This may or may not always align with the board of director’s wishes. Employees are those who make the business run. They carry out the various tasks associated with the company's mission. Employees report to the officers of the company.

The stockholders own the corporation. That ownership may be 100 percent in the hands of one individual, divided within a family or a few individuals, or spread among tens of thousands or millions. Though stockholders may not participate in day-to-day management or have a direct say in decision-making, major stockholders carry great weight in influencing corporate decisions. This group routinely votes on election and removal of directors, amending by-laws, major corporate changes (mergers, sales, dissolution), disposition of corporate assets and amendment of the Articles of Incorporation. Other stockholders may participate in these activities, but to a lesser extent.

The level of stockholders influence on the board of directors is one of many things to consider when forming a new corporation.

The main advantage of the corporate form is that the stockholders of a corporation have limited liability — no personal liability for the debts of the corporation. The corporation is legally responsible for its debts. Those who own the corporation, the stockholders, are not. Obviously, it is easier to raise capital if investors know that their risk of loss is limited to the amount they have put in.

Another advantage is that the separation of corporate ownership and management through al­lowing non-owners to hold positions of status and power encourages managerial talent. Also, allowing key managers to obtain shares of stock, often on advantageous terms, enables many managers to enjoy a part in ownership. One more advantage of the corporation form is the easy transferability of ownership. In fact, it is primarily through freedom to buy and sell stock that investors vote. If they like the company and the way it is going, they^; buy. If they do not, they sell. The death, retirement, or withdrawal of any stockholder need not affect the life of the corporation. This form permits larger businesses than are usually pos­sible under a proprietorship or partnership.

A corporation must pay income taxes on its profits. Stockholders must also pay income taxes on their dividends. This double taxation is a disadvantage. As mentioned above, individual stockholders are not likely to have any control over the corporation. In large corporations, they have no practical choice but to vote for directors proposed by the corporation's management group. As management and ownership are separated in all but the smallest corporations, managers may not have a direct interest in the profitable growth of the company. Officers and managers are, of course, employees of the corporation. They draw salaries from the corporation; and as long as they are on the payroll, they are paid regardless of the company’s performance. Since a corporation is set up by law, it is subject to certain governmen­tal requirements that do not apply to proprietors and partners. First, reports must be made to stockholders. When there are many stockholders, there can be little secrecy about assets, profits, costs and sales. The company may have to disclose detailed information about its assets and operations. Those who lend money to corporations must think about getting it back. If a corporation goes bankrupt, creditors can look only to corporation assets for satisfying their claims.

Concept check

1. Read each statement and decide whether it is true or false.

1. A corporation is the least complex of the three business structures.

2. Ownership is readily transferable in the corporation.

3. In the case of illness, death or other cause for the loss of an officer, the corporation stops to exist.

4. Delegation of management is one of the advantages of the corporation.

5. Corporation provides fewer incentives because a manager doesn’t share the profit.

6. Double taxation is one of the disadvantages of a corporation.

7. The level of secrecy in a corporation is greater in than in a partnership.

8. By selling and buying stocks the stockholders may vote.

2. Ask questions that may produce the following answers.

1. A corporation is an artificial being endowed by law with the rights, powers and duties of a natural person.

2. Corporations have to send their stockholders a report every year including audited financial statement.

3. The board of directors is responsible for drafting and amending the company.

4. Usually, a corporation is chartered for long life until its dissolution.

5. Because management and ownership are separated, managers may not have a direct interest in the profitable growth of the company.

Key learning points The selection of the form of ownership depends on the type of business, the number of owners and financial conditions. The sole proprietorship is a business structure where the only owner enjoys profits and takes on risks. The partnership is an association of two or more persons to carry on as co-owners of a business for profit. The corporation is a legal entity with the rights, duties and powers of a private person. It can receive, own and transfer property sue and to be sued and enter into contracts.