Types of Corporations

Video Transcription

Hi, I'm Jeff. And in this lesson, we'll learn about the different types of corporations, and how they differ from other forms of business. So let's get started.

A corporation is an organization that can legally operate as a separate entity. This was established by Chief Justice John Marshall in the case of Dartmouth College v. Woodward from 1819, where he stated a corporation is an artificial being, invisible, intangible, and existing only in the contemplation of law. From a legal standpoint, this means that a corporation is legally considered a person.

Corporations can be of any size, large or small, but this definition always applies. Due to this legal standing, corporations can sue or be sued, run a business, which means they can attempt to earn a profit through the sale of goods or services. Own, buy, and sell real estate. Lend and borrow money. Donate to political causes and campaigns. And sign binding contracts, which means they can be enforced by law.

Some of the advantages of launching a business as a corporation are limited liability. Owners are better protected. Continuity. The corporation can continue, even if the creators leave. Ease of funding. Credit is more easily extended to corporations. Easy to change ownership and specialized management, which we'll discuss later in this lesson.

The disadvantages are it is taxed twice-- first, when money is earned, then when it is paid out. Difficulty in decision making. The control can be spread throughout many people. Tender offers. Corporations can be acquired by another company, sometimes without the original creators' approval. Government regulation and lack of secrecy. Corporations must report critical information to those that own shares in the corporation.

Now, let's discuss some of the corporate ownership details. Corporations are owned through stock. Stock is a form of partial ownership of a corporation. People who own shares of stock for a corporation are called stockholders.

Corporations can either be public or private. Public corporations are owned through publicly traded shares on a securities exchange, while private corporations are owned by a defined set of investors. And the shares are not publicly traded.

These are some of the rights available to stockholders. Common stock rights, which carry the right to vote on certain matters, such as the election of board members. Preferred stock rights, which have rights in addition to common stock, such as the right to be paid dividends before common stockholders. A dividend is a payment of earnings to shareholders from an organization.

And the right to proxy, which are voting rights that are passed on to someone so he or she has the authority to act on behalf of the stockholder. Stockholders are part of the structure of a corporation. The other parts are the board of directors, corporate officers, and employees. All of these pieces act under corporate governance, which is the structure of rules, rights, and processes which govern an organization.

Before incorporation, which is the creation of a corporation occurs, it should be compared to sole proprietorships and partnerships. This should be done in consultation with a lawyer familiar with corporations, since some of the details can be complex. Incorporation can be in any state of your choosing. It can occur where you do the most business, or it can occur in a state that is more corporation friendly, such as Delaware or Nevada. Different states can have different costs and rules regarding incorporation.

You will also need to choose the type of corporation. There are four basic types of corporations, but at their core, they are either public or private. There is the S corporation. This is generally used when a corporation is privately held and smaller in size.

The limited liability corporation. This is the most varied, as it is used by small businesses all the way up to large businesses. A professional corporation, which is most common with lawyers and law firms. And the multinational corporation, which is often used with large companies.

There are other less common corporation types also. Some are categorized by location, such as domestic, foreign, and alien corporations. And there are non-profit corporations, which differ from other corporations because they retain their profit to meet their goals instead of returning the profit to stockholders in the form of dividends.

All right. That was a good job. We learned quite a bit of information today about choosing corporations as your business model and the advantages and disadvantages of that choice. We learned about corporate ownership and structure and about the different types of corporations. Thanks for your time, and have a great day.