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CORPORATE FORMS OF BUSINESS OWNERSHIP CHAPTER

6

OBJECTIVES

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.

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 FEATURES OF 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.

2.

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

2.

3.

4.

5.

To transfer ownership to others To vote for members of the ruling body of the corporation and other special matters that may be brought before the stockholders 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 To buy new shares of stock in a proportion to one’s present investment should the corporation issue more shares 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

by the corp.

– distributions of profits to shareholders The officers NOT the BOD are responsible for the day-to-day management

FORMATION OF

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CORPORATIONS

Preparing the certificate of incorporation

their own laws – no federal law exists)  (each state has 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

stock – must pay an organization tax, based on the amount of its capital

FORMATION OF CORPORATIONS

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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

Cash Assets Merchandise Equipment Land & Building $ 240,000 60,000 90,000 350,000 Claims Against Assets Accounts Payable (Liabilities Capital Stock $ 74,900 665,100 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 Jones Watson 580 170 800 _____ _____ _____

STOCKHOLDERS

Owners who elect board members

BOARD OF DIRECTORS

Selects officers and makes major policy decisions VICE PRESIDENT Robert. R. Burton

PRESIDENT

Jennifer L. York May also be called CEO and may be elected chair of the BOD SECRETARY & TREASURER Lu 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 - Disadvantages

Disadvantages

  – 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

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

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Businesses that may have an uncertain future (amusement parks)

 With an uncertain future it adds to the financial risk

Organized as a corporation?

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Native American Jewelry?

 Yes 

Vitamins?

 No

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.

2.

3.

4.

No more than 35 shareholders The business cannot own 80% or more of the stock of another corporation Not more than 25% of the income of the corp can be from sources other than for the purpose(s) stated in the charter Shareholders must be US citizens or residents

Feature Simple to start Decisions made by one person Low initial cost Limited liability Sole Proprietorship √ √ Partnership Corporation √ √ √ √ √ Limited government regulation Ability to raise capital Double taxation of profits √ √ S - Corp (LLC) √ √

Issues # of owners

1

Sole Proprietorship Partnership

No limit

Corporation

No limit

Start-up costs Liability

Fees for DBA and license Owner liable

Life of business

Death of owner Fees fro DBA and agreement Attorney fees for incorp. Documents and filing fees Partners liable Death or separation of partner unless otherwise notes s/h liable to amount of investment No effect Requires consent s/h free to sell

Transfer of interest Distribution of profits Management control

Owner free to sell Profits go to owner Owner has fullcontrol Profits shared based on agreement According to agreement Paid to s/h as dividends BOD who are appointed by s/h’s

SPECIALIZED TYPES OF 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 TYPES OF 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.