Corporate Forms of Business Ownership

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

• Must obtain a charter – sometimes called a certificate of incorporation

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

• Somewhat like an artificial person• Can make contracts, borrow money, own property, and sue or be

sued in its own name• Click here to learn more about the basics of a corporation

Stockholders

• Sometimes called shareholders• Owners of a corporation

• Buy share or shares (ownership divided into equal parts) to become a stockholder

• Thousands of people can be stockholders• Receive a certificate from the corporation

showing how many shares are owned

Basic Rights of a Stockholder

1. Transfer ownership to others2. Vote for members of the ruling body of the corporation and

other special matters considered by the stockholders3. Receive dividends (profits that are distributed to stockholder on

a per-share basis)• The decision to distribute dividends is made by the ruling body of the

corporation

4. Buy more shares if they are available to purchase5. Share in the net proceeds if the business goes out of business

• This would be the cash received from selling all assets after paying all debts

Board of Directors

• Sometimes called “directors” or the “board”• Ruling body of the corporation• Elected by the stockholders• Develop plans and policies to guide the corporation • Appoints officers to carry out the plans• Usually doesn’t play an active role in the company

unless profits fall or there are other difficulties• Large firms – 10 to 25 directors

Officers and Forming a Corporation

• Officers – top executives who are hired to manage the business• Appointed by the board of directors• Small corporations

• President, secretary, and treasurer• Large corporations

• May have vice presidents in different areas (ex. marketing, finance, and operations)

• Titles are often shortened• Ex. CEO (chief executive officer) and CFO (chief financial officer)

• In order to learn about what things need to be done to form a corporation, click here

Close and Open Corporations

• Close corporation• Sometimes called a closely held corporation• Does not offer its shares of stock for public sale• Only a few stockholders, some may help run the business as partners

would operate a business• Does not need financial activities disclosed to the public in most states

• Open corporation• Sometimes called a publicly owned corporation• Offers its shares of stock for public sale• Prospectus – formal summary of the chief features of the business and its

stock offering; must be furnished to each prospective buyer

Advantages and Disadvantages of a

Corporation

• Click here to learn more about the advantages of forming a corporation

• Click here to learn more about the disadvantages of forming a corporation

Specialized Types of Organizations

• Joint venture – agreement among two or more businesses to work together to provide a good or service

• Even a sole proprietorship and a company could agree to work together; formation of business is not important

• Ex. Two companies building a business development; each has different expertise

• Virtual corporation – network of companies that form alliances among themselves as needed to take advantage of fast-changing conditions

• More temporary than joint ventures• Ex. One company markets the goods, another provides the materials to

make the goods, and a third manufactures the goods

Specialized Types of Organizations (cont’d)

• Limited liability company – special type of corporation that is taxed as if it were a sole proprietorship or partnership

• Referred to as a LLC, previously called a S corporation• Provides lower taxes and limited liability• Must meet certain eligibility rules

• 35 stockholders or less• Business cannot own 80 percent or more of the stock of another corporation• No more than 25 percent of the corporation’s income can come from sources

other than for the purpose(s) stated in the chart• All stockholders must be individuals who are permanent citizens or residents

of the U.S.• Not a fit for large corporations or multinational firms, but many partnerships

can benefit from becoming a LLC

Specialized Types of Organizations (cont’d)

• Nonprofit corporation – organization that does not pay taxes and does not exist to make a profit

• Ex. Schools, American Cancer Society• Quasi-public corporation – business that is important, but lacks the

profit potential to attract private investors, and is often operated by local, state, or federal government

• Ex. Fannie Mae (Federal National Mortgage Association) and Sallie Mae (Student Loan Marketing Association) – affordable loan programs

• Cooperative – business owned and operated by its user-members for the purpose of supplying themselves with goods and services

• Ex. Food cooperative where members can sell and buy food, goal is to keep prices low

Reference

• Evarard, Kenneth E., Burrow, James L. (2001). Business Principles and Management. Mason, OH: South-Western.