CLOSE AND OPEN CORPORATIONS By Dylan Greenwell and Demetrius Bell

CLOSE CORPORATION A close corporation (also called a closely held corporation) is one that does not offer its shares of stock for public sale. The three former partners own all the stock and operate the business as well. A close corporation is basically under the radar in doing all the business.

OPEN CORPORATION A open corporation (also called a publicly owned corporation) is one that offers its shares of stock for public sale. A open corporation announces everything they do because a lot of people own small parts of said corporation.

ADVANTAGES OF CORPORATIONS Available Sources of Capital The corporation can obtain money from several sources. This helps to raise enough capital to run large scale businesses. Corporations find borrowing large sums of money less of a problem than Proprietorships or partnerships. Limited Liability of Stockholders The owners (stockholders) are not legally liable for the debts of the corporation beyond their statement in the shares purchased. People can invest without incurring liability beyond their original investment.

ADVANTAGES OF CORPORATIONS (CONT’D) Permanency of Existence The corporation is a more permanent type of organization than the proprietorship or the partnership. Corporations can continue to operate indefinitely or only as long as the term stated in the charter. The deal or withdrawal of an owner (stockholder) does not affect its life. Ease in Transferring Ownership It is easy to transfer ownership of a corporation. Stockowners can sell stock to another person and transfer the stock certificate which represents ownership to the new owner. When shares are transferred, the transfer of ownership is indicated in the records of the corporation.

DISADVANTAGES OF CORPORATIONS Taxation Corporation is subject to more taxes than partnerships and proprietorships Profits distributed to stockholders as dividends are taxed twice. Shareholders pay taxes on dividends they receive from the corporation. Some taxes are unique to the organization Filing fee (which is payable on application for a charter) Organization tax – Based on the amount of authorized capital stock Annual State tax – Based on profits Federal Income tax Government Regulations and Reports A corporation cannot do business wherever it pleases. ( York, Burton, and Chan, Inc., has permission only to conduct business in the State of New York) To form a corporation a government charter must be submitted to the appropriate state official (Usually Secretary of State) Each state usually has the corporation obtain a license and pay a fee in order to do business in that state. There is a greater need for detailed financial records.

DISADVANTAGES OF CORPORATIONS (CONT’D) Stockholders’ Records By law, stockholders must be informed of corporate matters, notified or meetings, and given the right to vote on important matters. Letters and reports must be sent to stockholders on a regular basis. Each time a share of stock is bought or sold, and whenever a dividend is paid, detailed records must be kept. Charter Restrictions A corporation is allowed only to engage in those activities that are stated in its charter. If a corporation wants to change what it does, or add on to it, they would have to go to the state to obtain a new charter or change the old one.

VOCAB Close corporation Open corporation Closely held corporation Publicly owned corporation prospectus

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ACTIVITY What are two advantages of a corporation? What are two disadvantages of a corporation? An Open Corporation is also called what? Who pays more taxes, corporations or proprietorships? If you invest in a corporation (Buy Stock) will you be liable for more than your original investment?