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Types of Corporations

Types of Corporations

Author: James Howard

This lesson is an introduction to corporate ownership and types of corporations.

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Hello and welcome to this tutorial on types of corporations. Now, as always with these tutorials, please feel free to fast forward, to pause, or rewind as many times as you need in order to get the most out of the time that you spend here.

So we've talked about sole proprietorships, but what happens when you don't want to be a sole proprietorship anymore? Well, in this lesson, we're going to cover the corporate alternative. We're also going to look at corporate ownership, different types of corporations, as well some other types that you may not have heard of. The key terms for this lesson are going to be "corporations," "corporate governance," "dividends," "stock, "stockholders," and "proxy."

Well, let's take a look at corporations. Well, a corporation is defined as an organization that legally operates as a separate entity. Before with a sole proprietorship or partnership, the owners of the business and the business were indistinguishable. In this case, with a corporation, they're two separate entities.

So what makes a corporation? Well, corporations can be large or small. They don't have to be the big named ones that you think of, like AT&T. And they have different rights than other businesses because they're legally considered a person. The Supreme Court case of Dartmouth College v. Woodward in 1819 set this precedent. In the opinion written by Chief Justice Marshall, he wrote that a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.

So what does it mean to have personhood? Well, that means that a corporation can sue or be sued. It can run a business or attempt to earn a profit through the sale of goods and services. It can own, buy, or sell real estate. It can lend and borrow money. It can donate to political campaigns or causes. And it can sign enforceable, binding contracts.

Some advantages of being a corporation are limited liability because as a separate entity, the owners of the corporation are shielded from liability and lawsuits that arise from the operation of business. Continuity is a definite plus here. If an owner dies, you simply sell their share of the ownership to someone else. Because it's a separate entity, the business goes on.

It can be really easy to raise money. Changing ownership is also very easy because all you have to do is sell your share of ownership to someone else. They also have specialized management that's hired by the board of directors to run that business.

Some disadvantages of being a corporation are dual taxation. Because they're a separate entity, the business profits are taxed and then any distributions to the owners are also taxed as well. Decision making can be a problem because the owners may not always agree with how the business is being run by the people that specialize in management they've hired.

Tender offers are a constant threat to the owners of a business. In order to buy a corporation that's publicly held, all one has to do is acquire a majority of the shares of stock, and any one person or entity can do this. Corporations are also very heavily regulated by the US government. And there's a lack of secrecy because, especially if you're publicly held, you are required by law to divulge certain financial and company operations information every year.

Corporate ownership is represented by shares of stock. And stock is a form of partial ownership of a corporation. Stock is owned by stockholders, the people who own the shares of stock for a corporation.

Now, corporations can be publicly owned or they can be privately owned. A publicly owned corporation is owned through publicly traded shares like we just discussed, where privately owned corporations are owned by a defined group of investors. And they're not publicly traded.

Now, stockholders as owners of a company have certain rights. Now, this largely depends on the type of stock that you have. Common stock has voting rights. They can vote on who gets to be on the board of directors and how the business is run. They're also issued dividends and because they're stockholders, that stock represents ownership in the company.

Now, if I can't get to the annual meeting to cast my votes, I can vote by proxy. Proxy is simply voting rights that are passed on to someone so he or she has the authority to act on behalf of the stockholder.

Preferred stock, on the other hand, is non voting. They don't get a say, or direct say, in how the business is run. Now the benefit of having preferred stock is that any dividends that are paid are paid to preferred stockholders before common stockholders. So they have priority in the earnings of the business.

Well, a dividend. What's a dividend? A dividend is a payment of earnings to shareholders from an organization. Profits that come from the business that are distributable to the shareholders are paid out through dividends attached to each share of stock.

Now, corporate governance, kind of how this all comes together, is simply the structures of rules, rights, and processes which govern a corporation.

Now let's take a look at basic corporate structure. The basic hierarchy of a corporation are the stockholders are first. They are the owners of the business. It's their business. They get a very definite say in who gets to run the business, and they do this by appointing or electing a board of directors.

Now, the board of directors, they're in charge of the strategic vision of the business. And they also hire the corporate officers who do the day to day operation of the business and are responsible for running it and making a profit for the shareholders. Last are the employees. Everyone below the corporate officers are considered simply employees. And these are the people who manage, produce, and sell the different products and services that are offered by the business.

Well, how do I become a corporation? Well, first of all, consult a lawyer. This could be a pretty complicated process. And you can incorporate in any state that you like. You don't have to incorporate in the state you're doing business in. The primary reason people look to different states is because there's a large difference in cost and also in regulation. Delaware and Nevada are the most popular. They're considered very corporation friendly.

Now, there are different types of corporations. The first one we're going to look at is the S-corp. Now, these are privately held, typically, and they're smaller organizations. They're not going to be very big typically.

The next one is a limited liability corp, which is kind of a unique animal. Now, it's the most varied of the different types of corporations. And they can be small, individuals, single owners who have incorporated up to larger businesses.

The next is a professional corporation. These are typically lawyers and law firms. And the last is a multinational corporation. These are the larger companies, like Ford Motor Company, AT&T, and Microsoft, that do business worldwide.

Now there are some other types of corporations that you may not have heard of. And they're typically characterized by the location where they operate and are headquartered. Domestic corporations do business within a state, where they are also incorporated or a nation. Foreign corporations are corporations that are headquartered in another country but do business overseas. For instance, Mercedes-Benz would be a foreign corporation here because their headquartered in Germany but sell cars here in America.

And lastly, an alien corporation, well, that's a domestic corporation, only they do most of their business in a place other than where they're headquartered. So let's think back to incorporating in either Delaware or Nevada. If I headquarter and incorporate in Nevada but I do most of my business in California, then in California I'd be considered an alien corporation.

There are also non profit corporations. Now, non profit corporations are treated differently for tax purposes. They don't pay federal taxes. And the reason for this is because their primary goal is not making a profit. They're banned from making profit. All their profits must go back into the business. But that's OK because their primary goal isn't profit motivated. It's another cause.

So let's recap. We looked at the corporate alternative, what it might take to become a corporation. We also looked at corporate ownership, those stockholders, the board of directors, the corporate officers, and so forth. We looked at different types of corporations, like the S-corp or the professional corporation. And we looked at other types that we may not have heard of, those ones that are primarily geographic based or are non profit in nature.

I want to thank you for spending some time with me. Have a great day.

  • Corporate Governance

    The structures of rules, rights, and processes which govern a corporation.

  • Dividend

    A payment of earnings to shareholders from an organization.

  • Stock

    A form of partial ownership of a corporation.

  • Stockholders

    People who own shares of stock for a corporation.

  • Proxy

    Voting rights that are passed on to someone so he/she has the authority to act on behalf of the stockholder.

  • Corporations

    An organization that can legally operate as a separate entity.