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 itself were indistinguishable. In this case, with a corporation, they are two separate entities.
Corporations can be large or small. They don't have to be the big-named ones that you may think of, like AT&T.
They also have different rights than other businesses because they are legally considered a person.
EXAMPLEThe Supreme Court case of Dartmouth College v. Woodward in 1819 set this precedent. In the opinion written by Chief Justice Marshall, it stated that a corporation is an artificial being--invisible, intangible, and existing only in contemplation of law.
To have personhood means several things, including:
Let's take a look at some advantages and disadvantages of being a corporation.
|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.||Dual taxation because they're a separate entity, the business profits are taxed, and then any distributions to the owners are taxed as well.|
|Continuity because 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.||Decision making can be a problem because the owners may not always agree with how the business is being run by the people they've hired that specialize in management.|
|Easy to raise money.||Tender offers are a constant threat to the owners of a business. 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.|
|Change of ownership is quite easy because all you have to do is sell your share of ownership to someone else.||Regulations because the U.S. government very heavily regulates corporations.|
|Specialized management that is hired by the board of directors to run the business.||Lack of secrecy because, 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, which 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.
Corporations can be publicly owned or privately owned. A publicly owned corporation is owned through publicly traded shares like we just discussed, whereas privately owned corporations are owned by a defined group of investors and they're not publicly traded.
Stockholders, as owners of a company, have certain rights. This largely depends on the type of stock that they have.
Corporate governance is simply the structures of rules, rights, and processes which govern a corporation. Let's take a look at the basic corporate structure.
|Board of Directors|
In the basic hierarchy of a corporation, the stockholders are first. They are the owners of the business--it's their business. They get a very definite say in who runs the business, and they do this by appointing or electing a board of directors.
The board of directors is in charge of the strategic vision of the business. 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. These are the people who manage, produce, and sell the different products and services that are offered by the business.
There are many different types of corporations:
|Type of Corporation||Description|
|S-Corporation (S-Corp)||Privately held and pass through income to shareholders. Typically are smaller organizations.|
|Limited Liability Corp (LLC)||Unique and the most varied of the different types of corporations. Blends elements of corporate and partnership structures. Can be small, even individuals, or single owners, who have incorporated up to larger businesses.|
|Professional Corporation||Typically lawyers and law firms. Must identify themselves with PC at the end of their corporate name.|
|Multinational Corporation||Larger companies, like Ford Motor Company, AT&T, and Microsoft, that do business worldwide.|
|Non-Profit Corporation||Treated differently for tax purposes. Don't pay federal taxes, because their primary goal is not making a profit. Banned from making a profit. All profits must go back into the business, which is fine because their primary goal isn't profit-motivated; rather, it's another cause.|
There are some other types of corporations that you may not have heard of. They are typically characterized by the location where they operate and are headquartered.
Source: ADAPTED FROM SOPHIA INSTRUCTOR JAMES HOWARD