Book Opener

Corporationsl How to definecorporationl How to distinguishamong various typesof corporationsl How to create acorporationl How to finance acorporationl How to distinguishbetween a corporationand a limited liabilitycompanyUnderstanding the natureof a corporation will helpyou decide when to formone rather than the otherassociations that areavailable.l corporationl shareholderl sharel promoterl articles ofincorporationl certificate ofincorporationl common stockl dividendsl preferred stockl limited liabilitycompany (LLC)The Nature of a CorporationAlthough partnerships and sole proprietorships are excellent formsof organization for some kinds of businesses, about 90 percent of allbusiness in the United States is done by corporations. A corporationis a body formed and authorized by law to act as a single person, distinctfrom its members or owners. The word “corporation” generallybrings to mind large businesses such as McDonald’s and AOL TimeWarner. Not all corporations are large, however. In fact, approximately40 percent of all corporations employ fewer than five employees.Regardless of their size, all corporations have the same basic form.An individual who owns shares of a corporation is called ashareholder or a stockholder. A share is a single unit of ownershipof a corporation. Each shareholder has one vote for each share of stockthat he or she owns in the corporation. Shareholders cast their votes toelect a board of directors whose duty is to direct the corporation’sbusiness.Advantages of a CorporationThere are several advantages in doing business as a corporation. Forexample, selling shares enables a corporation to tap into a large sourceof capital that is unavailable to partnerships and sole proprietorships.Each shareholder’s liability is limited to the amount of money he or shepaid for shares in the corporation. Another advantage of a corporationis that it is a legal entity, or a legal person, created by the state. Consequently,it has the power to make contracts, buy and sell goods, sue, andbe sued. Another distinct advantage to the corporation is that it has continuityof existence. This means that a corporation continues to exist,regardless of the lifespans of its founders, shareholders, managers, anddirectors.Disadvantages of a CorporationLike sole proprietorships and partnerships, corporations have disadvantages.For instance, a corporation’s income may be taxed morethan once. This happens when a corporation distributes part or all of itsprofits, after taxes, to its shareholders in the form of dividends. Theshareholders’ dividends become part of their taxable income. In this606 Unit 6: Starting a Business