Business: 4.4 - 4.5

Steps to forming a corporation

1. Consult a lawyer to be sure that all legal requirements are met (technically optional, but recommended) 2. Decide where to incorporate 3. Submit the articles of incorporation to the secretary of state 4. The articles of incorporation are approved and become a contract between a corporation and the state in which the state recognizes the formation of the artificial person that is the corporation 5. The incorporators and original stockholders meet to adopt corporate by-laws and elect their first board of directors (Later, directors will be elected or reelected at the corporation's annual meetings by the firm's stockholders)

Corporation Stats

19% of all businesses 6 million corporations in the US 81% of sales revenues

Deciding where to incorporate a business

A business is allowed to incorporate in any state that it chooses Most small- and medium-sized businesses are incorporated in the state where they do the most business Larger corporations often compare the benefits that various states provide to corporations Decision of where to incorporate is usually based on the cost of incorporating in one state compared with the cost in another state and the advantages and disadvantages of each state's corporate laws and tax structure

Perpetual Life

A corporation exists independently of its owners and survives them

Alien Corporation

A corporation formed in another country but doing business in the United States

Domestic Corporation

A corporation in the state in which it is incorporated

Government Regulation and Increased Paperwork

A corporation must meet various government standards before it can sell its stock to the public Must file many reports on its business operations and finances with local, state, and federal governments The corporation must make periodic reports to its stockholders about various aspects of the business Attornies, certified public accountant, and other professionals are often necessary regularly A corporation's activities are restricted by law

Open Corporation

A corporation whose stock can be bought and sold by any individual

Closed Corporation

A corporation whose stock is owned by relatively few people and is not sold to the general public

Dividend

A distribution of earnings to the stockholders of a corporation

Board of Directors

A group of persons elected by the stockholders to manage a corporation The top governing body of a corporation Since the board is elected by the stockholders, the stockholders are able to control the activities of the entire corporation Can be chosen from within the corporation or from outside it In most states, only one director is required for small corporations, although more directors are allowed Ex: President, executive vice presidents Those elected from outside the corporation generally are experienced managers or entrepreneurs with proven leadership ability and/or specific talents the organization seems to need In smaller corporations, majority stockholders usually serve as board members

Proxy

A legal form listing issues to be decided at a stockholders' meeting and enabling stockholders to transfer their voting rights to some other individual or individuals The stockholder can register a vote and transfer voting rights simply by signing and returning the form Most corporations also allow stockholders to exercise their right to vote by proxy by accessing the Internet or using a toll-free phone number Made because common stockholders usually live all over the nation and cannot attend the annual meeting

Stock

A share of ownership in a corporation

Articles of Incorporation

A written legal document that defines ownership and operating procedures and conditions for the business Submitted to the secretary of state Includes... 1. The firm's name and address 2. The incorporators' names and addresses 3. The purpose of the corporation 4. The maximum amount of stock and types of stock to be issued 5. The rights and privileges of stockholders 6. The length of time the corporation is to exist

Ease of Transfer of Ownership

Accessing a brokerage firm Web site or a telephone call to a stockbroker is all that is required to put most stock up for sale Willing buyers are available for most stocks at the market price Practically no restrictions apply to the sale and purchase of stock issued by an open corporation

Corporation

An artificial person, invisible, intangible, and existing only in contemplation of the law An artificial person created by law, with most of the legal rights of a real person AKA a regular or C-corporation

Corporate Officers

Appointed by board of directors Ex: The chairman of the board, president, executive vice presidents, corporate secretary, and treasurer Responsibilites: Help the board to make plans, carry out strategies established by the board, hire employees, and manage day-to-day business activities Periodically (usually each month), they report to the board of directors

What are the two basic types of stock?

Common stock Preferred stock *Although large corporations may issue both common and preferred stock, generally small corporations issue only common stock

Conflict Within the Corporation

Conflict can cause problems The pressure to increase sales revenue, reduce expenses, and increase profits often leads to increased stress and tension for both managers and employees

Specialized Management

Corporations are able to recruit more skilled, knowledgeable, and talented managers This is because they pay bigger salaries, offer excellent employee benefits, and are large enough to offer considerable opportunity for advancement

Double Taxation

Corporations must pay a tax on their profits In addition, stockholders must pay a personal income tax on profits received as dividends

Disadvantages of Corporations

Difficulty and expense of formation Government regulation and increased paperwork Conflict within the corporation Double taxation Lack of secrecy

Limited Liability

Each owner's financial liability is limited to the amount of money he or she has paid for the corporation's stock Creditors have a claim only on the corporation's assets, not on the stockholders' personal assets

Difficulty and Expense of Formation

Forming a corporation can be a relatively complex and costly process Attornies are often necessary Application fees, attorney's fees, registration costs associated with selling stock, and other organizational costs can build up

Foreign Corporation

In a given state, a corporation that does business in the state but was not incorporated in that state

Advantages of Corporations

Limited Liability Ease of Raising Capital Ease of Transfer of Ownership Perpetual Life Specialized Management

Corporate Structure

More complex than other business forms Includes a board of directors and corporate officers

Ease of Raising Capital

One of the most effective forms of business ownership for raising capital Corporations can borrow from lending institutions just like other business forms Corporations can also sell stock, however, unlike other business forms Individuals are more willing to invest in corporations than in other forms of business because of limited liability

Lack of Secrecy

Open corporations are required to submit detailed reports to government agencies and to stockholders and so they cannot keep secrets Competitors can use these secrets

Preffered Stock

Owners have no voting rights, but their claims on dividends are paid before those of common-stock owners

Common Stock

Owners of common stock may vote on corporate matters Generally, an owner of common stock has one vote for each share owned However, any claims of common-stock owners on profits, dividends, and assets of the corporation are paid after the claims of others

Responsibilites of the board of directors

Set company goals and develop general plans (or strategies) for meeting those goals Responsible for the firm's overall operation and appointing corporate officers Report to the stockholders at the annual meeting

Stockholders

The people who own a corporation's stock—and thus own part of the corporation

Rights of a Corporation

The right to start and operate a business The right to buy or sell property The right to borrow money The right to sue or be sued The right to enter into binding contracts

What is the rights of the owners of both common and preferred stock?

To share in the profit earned by the corporation through the payment of dividends (most important right) To receive information about the corporation To vote on changes to the corporate charter To attend the corporation's annual stockholders' meeting, where the right to vote may be exercised