1. Some Very Basic Info on Corporations and Stocks Part I By Mr. Leavins, Baldwin County High School

2. 1. What are three of the major types of business firms in the United States? Sole Proprietorship Partnership Corporation

3. 2. What is a Sole Proprietorship? A sole proprietorship is a business organization in which the owner of the firm assumes all risks, liabilities, legal judgments, and tax burdens of the firm In essence, the proprietor (the owner) is the direct owner of the firm and is entitled to all of the profits of the firm, and in turn, bears the burden of all financial losses as well. An example of a sole proprietorship: A person that owns and operates a small restaurant

4. 3. What is a Partnership? A partnership is a business organization where two or more owners of a firm are jointly responsible for the risks, liabilities (debts), and tax burdens of the firm. In some partnerships, one or more partners might have limited liabilities in terms of financial risk The partners (the two or more people who own the firm) are entitled to the financial profits earned by the firm, and in turn, all or some of the partners bear the burdens of financial losses suffered by the firm Partners in the firm own percentages of the firm in accordance with mutual agreements set up by the partners For example, one partner might own 25% of the firm; another might own 40%; another might own 35%. In short, partnerships come in all sorts of sizes and proportions. Law, medical, and accounting firms are often partnerships

5. 4. What is a Corporation? A corporation is a business organization in which the firm has a legal existence that is independent of the owner(s) of the company A corporation is a business entity that is an “artificial person” that absorbs much of the risk that the owner(s) would have to assume in a proprietorship or partnership In essence, a corporation provides “limited liability” for the owners of the firm in that the owners (the shareholders) only risk the money that they invested in the company, if any. Should the corporation prove to be unable to pay its debts, should it incur a negative legal judgment, should the corporation fail as a business enterprise, the owners (shareholders) would only lose the money that they invested, and nothing more

7. 5. What are some of the advantages of a corporate business structure? The owners of the company enjoy limited legal and financial liability regarding the business activities of the corporation. For example, if one of the corporation owners invested $10,000 in a certain corporation, then he/she has only risked the $10,000 investment, and nothing more. Such an investor will NOT be personally liable for any of the financial debts or legal judgments incurred by corporation. Limited liability, as such, reduces the risk that a investor might take when he/she becomes either the sole or joint owner of a corporation. Limited liability makes it possible for some corporate business enterprises to find many investors who will be willing to invest large amounts of money in the company Such high level of investment allows such a corporation potentially to conduct very large and expensive business enterprises For example: car manufacturers, oil companies, railroad companies, steel manufacturers, airlines, computer manufacturers, banks, national retailers

8. 6. In what manner is a corporation “owned?” A corporation is legally structured in such a way that it is owned by the shareholders The Shareholders are people (or an individual) or institutions who own the shares (or portions) in the company. These shares in the company are known as STOCK. In some corporations, if someone controls over 50% of the shares of stock, then that person (or family or some other group) controls the governance of that corporation Corporations are owned, governed, and to some degree, managed in accordance with the rules set forth in the corporate charter that serves as the founding document (a constitution, if you will) of the company

9. 7. How is a corporation controlled and managed? In many corporations, the shareholders are allowed to vote into office the people who will control the operations (production of goods and/or services) of the company In essence, the shareholders elect the Board of Directors, and the Board of Directors, in turn, hire various employees to carry out the operations of the corporation. In many corporations, the Board of Directors hire the company President, vice presidents, a Chief Executive Officer (CEO), Chief Operations Officer, Chief Financial Officer, etc. Such executives (the CEO and others) then hire other managers and workers

10. 8. Where do corporations come from? Think of corporations as having two parents Parent #1: The entrepreneur(s) (the person or group with a business idea) Parent #2: A corporate charter-approving government (state or federal government) The entrepreneur(s) initiate the creation of a corporation by seeking to create a particular type of business enterprise per a corporate charter, particularly a business enterprise with limited liability for the entrepreneur and any additional investors In the United States, a corporate charter has to be approved by either a state (e.g. New Jersey, Delaware, Alabama) or the federal government of the United States of America The creation of a corporate business enterprise is called incorporation.

11. 9. What is a privately-held corporation? A privately-held corporation is a corporate entity in which the stockholders do NOT sell their shares of stocks in secondary markets (stock markets) to the general public A privately-held corporation is often called a privately-held company. Some privately-held corporations have number of shareholders that is much smaller than publicly-held corporations. We will be turning our attention to publicly-held corporations very shortly Some privately-held corporations are small companies, but some are very large Koch Industries is a prime example (in 2016) of a privately-held corporation that is a very large company Shares of stock in privately-held corporations are NOT sold on stock exchanges such as the New York Stock Exchange

12. 10. What is a publicly-held corporation? A publicly-held corporation (aka, a public company) is a firm in which individuals and institutions may own, buy, and sell shares of stock in the company Such shareholders (i.e. owners of stock shares) are thereby entitled to receive their portion (based on the number of shares of stock they own) of the financial profits of the company via payments known as dividends. The public corporation issues shares of stock as a way to secure the needed funds to carry out its business operations A publicly-held corporation is required by government authorities to make financial information about the company available to the general public Like a privately-held corporation, a publicly-held corporation is owned by its shareholders As such, the board of directors and officers of the publicly-held corporation seek to earn profits for the company’s shareholders

13. 11. What is stock, and what are the potential benefits of owning it? Stock is a unit of ownership in a corporation, and is often referred to as a “share of stock” or “shares of stock” When a corporation pays out all or some of its financial profits to its owners, it pays it out as a dividend per share of stock For example, the officers of the corporation might decide to pay out some of the company’s quarterly profits via a dividend of—let’s say-- $1.22 per share of stock (I arbitrarily made up the $1.22 dividend amount) The amount of the dividend per share could be any amount, in theory, but realistically, a dividend will likely range from a few cents to a few dollars per share of stock in a publicly-owned corporation. A shareholder might also make money off of stock by selling some or all of his/her shares, and as such, receive a financial profit from the sale of the share(s) of stock A shareholder who profitably sells any amount of stock has earned a capital gain

14. 12. Why might a corporation “go public?” One reason the officers of a corporation might decide to “go public” would be to raise additional funds (capital) in order to expand operations and/or enhance the financial condition of the company For example, corporations engaging in large and complex enterprises (e.g. railroads, auto makers, telephone companies, etc.) might wish to be publicly-traded companies in order to be able to raise the capital necessary to carry out multi-million or even multi-billion dollar operations The development of the publicly-traded corporation is one of the most important innovations in the history of free enterprise capitalism The rise of “Big Business” is closely connected with the development of the modern corporations, particularly publicly-held corporations

16. 13. What is an IPO, and What’s the Role of an Investment Bank in an IPO? When a corporation first sells particular shares of stock to the public in a primary market, it is called an Initial Public Offering (IPO) The mechanics of selling the IPO is typically carried out by an investment bank The investment bank (e.g. Goldman Sachs, Morgan Stanley) underwrites the issuing of the IPO stock Underwriting involves the investment bank making either a firm commitment or best efforts basis of selling the IPO The investment bank, in turn, can make money off of the IPO by buying all of the soon-to-be-publicly-issued stock at a discount, and then sell it to the public at the IPO price (This is the firm commitment basis of underwriting the IPO) Reputable investment banks often use the firm commitment basis

18. 14. How are stocks traded in secondary markets? Once stock has been sold via an IPO, shares of that stock can traded in secondary markets known as stock exchanges. At stock exchanges (e.g. The New York Stock Exchange, NASDAQ) individuals and institutions can buy and sell shares of stock at prices resulting via the process of supply and demand Brokerage firms receive and process “buy” and “sell” orders from customers Brokerage firms charge commissions (or fees) for carrying out these buying and/or selling orders. Once an individual or institution buys any number of shares of stock in a given company, then that person or institution has become a shareholder of that particular publicly-held corporation The shareholder, in turn, can sell those shares to a buyer at any juncture

19. The New York Stock Exchange in NYC