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									CORPORATE FORMS                                      CHAPTER

OF BUSINESS                                              6
   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

 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)
 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
1. Stockholders (shareholder)
      The owners of a corporation
      Shares – Equal parts of the division of
       ownership of a corporation
2. 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

3. Officers
    The top executives who are hired to
     manage the business
    BOD appoints them
    CEO (Chief Executive Officer) – top
    CFO (Chief Financial Officer) – financial

 Ownership is in the form of stocks
 Share of Stock – unit of ownership in a
    Shareholder/stockholder
    A person who buys one share becomes a
 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
Stockholders basic rights:
1.   To transfer ownership to others
2.   To vote for members of the ruling body of the corporation and
     other special matters that may be brought before the
3.   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
4.   To buy new shares of stock in a proportion to one’s present
     investment should the corporation issue more shares
5.   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

 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 – distributions of profits to shareholders
  by the corp.
 The officers NOT the BOD are responsible for the
  day-to-day management
   Preparing the certificate of incorporation (each state has
    their own laws – no federal law exists)
      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 – must pay an
  organization tax, based on the amount of its capital

 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
                                     Claims Against
Cash            $ 240,000        Accounts        $ 74,900
Merchandise           60,000     Capital Stock    665,100

Equipment             90,000

Land &               350,000

Total               $740,000     Total           $740,000

                     Assets = Liabilities + Capital
Handling Voting Rights

 Stockholders usually have one vote for each share
 How many votes does Burton, Chan, and York each
     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
   Corporate Voting Example

         Value per share: $200
Stockholder Shares          Votes?
Smith         580           _____
Jones         170           _____
Watson        800           _____
                      Owners who elect board members

                        BOARD OF DIRECTORS
                            Selects officers and
                        makes major policy decisions

                              Jennifer L. York
                          May also be called CEO
                     and may be elected chair of the BOD

VICE PRESIDENT                                      SECRETARY & TREASURER
 Robert. R. Burton                                         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

 Businesses that require large amounts
  of capital (airlines, hotels and auto
 Businesses that may have an uncertain
  future (amusement parks)
   With an uncertain future it adds to the
    financial risk
Organized as a corporation?

 Vitamins?
   No
 Native American Jewelry?
   Yes
 Sneakers?
   No
 Collector Coins?
   Yes
 AKA Limited Liability Corporation (LLC)
 Similar to a corp. but income is taxed like a
 Corp. does NOT pay taxes on its profits
 Individual shareholders are taxed on their
 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. No more than 35 shareholders
2. The business cannot own 80% or more of
   the stock of another corporation
3. Not more than 25% of the income of the
   corp can be from sources other than for the
   purpose(s) stated in the charter
4. Shareholders must be US citizens or
     Feature            Sole         Partnership   Corporation   S - Corp
                    Proprietorship                                (LLC)
Simple to start
                          √              √
Decisions made
by one person             √
Low initial cost
Limited liability
                                                       √            √
government                √              √

Ability to raise
capital                                                √            √
Double taxation
of profits                                             √
      Issues            Sole            Partnership         Corporation

# of owners        1                 No limit           No limit

Start-up costs     Fees for DBA      Fees fro DBA and   Attorney fees for
                   and license       agreement          incorp. Documents
                                                        and filing fees

Liability          Owner liable      Partners liable    s/h liable to amount
                                                        of investment

Life of business   Death of owner    Death or           No effect
                                     separation of
                                     partner unless
                                     otherwise notes

Transfer of        Owner free to     Requires consent   s/h free to sell
interest           sell

Distribution of    Profits go to     Profits shared     Paid to s/h as
profits            owner             based on           dividends
Management         Owner has         According to       BOD who are
control            fullcontrol       agreement          appointed by s/h’s
 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
   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
           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.

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