1. CHAPTER OBJECTIVES CORPORATE FORMS OF BUSINESS OWNERSHIP nExplain the basic features of a corporation. nDescribe how a corporation is formed and organized. nList some of the major advantages and disadvantages of the corporate form of business. nDescribe several specialized forms of business organizations. 66

2. Corporations n17% of all businesses (87% of all sales) nFew in number, but generally large in size nCorporate sales were over 17x more than sales from SP and over 16x more than partnerships nExamples: Ford and K-Mart nLegal entity in and of itself nTreated independently of its owners nThe corp. (NOT the owners) pay taxes, make contracts, borrow money, own property, and is held liable (can sue or be sued) nSurvive the death of its owner(s)

3. BASIC FEATURES OF CORPORATIONS nCorporation nBusiness 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 nAn artificial person created by the laws of the state (legal rights similar to those of individuals – make contracts, own property, sue and be sued) nCharter n(Certificate of Incorporation) – the official document through which a state grants the power to operate as a corporation

4. 3 key types of people in a corporation: 1.Stockholders (shareholder) nThe owners of a corporation nShares – Equal parts of the division of ownership of a corporation 2.Directors (BOD) nThe ruling body of the corporation nElected by the stockholders nDevelop plans and policies to guide the corp as well as appoint officers to carry out the plan nGenerally consists of 10-25 directors (top exectives, executives from other corp (college prof), or stockholders with many shares)

5. 3 key types of people in a corporation: 3.Officers nThe top executives who are hired to manage the business nBOD appoints them nCEO (Chief Executive Officer) – top officer nCFO (Chief Financial Officer) – financial officer

6. Stockholder nOwnership is in the form of stocks nShare of Stock – unit of ownership in a corporation nShareholder/stockholder nA person who buys one share becomes a stockholder nStockholders are NOT liable for the debts of the corp. and can only lose the money they have invested nNo liability beyond the extent of the stockholder’s ownership

7. 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 stockholders 3.To receive dividends (the decision to distribute profits is made by the ruling body) nProfits 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

8. Corporations nBoard of Directors (BOD): nBOD are elected nGroup of people who meet several times a year nMake important decisions affecting the co. nElect senior officers & determine their salaries nSet the corp. rules & regulations nDecides how much the co. will pay in dividends nAny shareholder has the right to attend meetings and vote nDividends – distributions of profits to shareholders by the corp. nThe officers NOT the BOD are responsible for the day-to-day management

9. FORMATION OF CORPORATIONS nPreparing the certificate of incorporation (each state has their own laws – no federal law exists) nDomestic corp. – file in the state in which you plan to conduct business nForeign corp. – charted in another state other than in the one they are conducting business nNaming the business – usually required by law to indicate that a corp has been formed (Corporation, Corp., Incorporated, or Inc.) nStating the purpose of the business – description of its purpose (“to operate a retail food service”) nInvesting in the business nCapital Stock – the general term applies to the shares of ownership of a corporation nPaying incorporation costs – must pay an organization tax, based on the amount of its capital stock

10. FORMATION OF CORPORATIONS nOperating the new corporation nGetting organized nPrepare a balance sheet or statement of financial position nHandling voting rights nMust send each stakeholder notices of all stockholders’ meetings to be held nProxy – written authorization for someone to vote on behalf of the person signing the proxy

11. 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

12. Assets Claims Against Assets Cash$ 240,000Accounts Payable (Liabilities $ 74,900 Merchandise60,000Capital Stock665,100 Equipment90,000 Land & Building 350,000 Total$740,000Total$740,000 Assets = Liabilities + Capital

13. Handling Voting Rights nStockholders usually have one vote for each share owned nHow many votes does Burton, Chan, and York each have? n2,217 (6,651 total) nOver 50% of the total votes nWhat if Chan sold 1,200 of his votes to Burton? nBurton would have 3,417 votes (2,217 + 1,200) nBurton would have more than 50% of the total 6,651 shares of stock that have been issued nBurton could control the corporation (York and Chan would lose if Burton voted differently from them on an important issue)

14. Corporate Voting Example Value per share: $200 StockholderSharesVotes? Smith580_____ Jones170_____ Watson800_____

15. STOCKHOLDERS Owners who elect board members BOARD OF DIRECTORS Selects officers and makes major policy decisions PRESIDENT Jennifer L. York May also be called CEO and may be elected chair of the BOD VICE PRESIDENT Robert. R. Burton SECRETARY & TREASURER Lu Chan

16. Close and open corporations Close corporation nAlso called closely held corporation nDoes not offer shares of stock for public sale nJust a few stockholders own it Open corporation nAlso called publicly owned corporation nOffers shares of stock for public sale nLarge number of stockholders nProspectus – a formal summary of the chief features of the business and its stock offering nMust be furnished to each prospective buyer of newly offered stocks (or bonds)

17. Corporation - Advantages Advantages – nLimited liability nLimited to the amount invested in stock nAbility to raise capital nContinuity of business nTransferable ownership

18. Corporation - Disadvantages Disadvantages – nDouble taxation nEntity pays taxes on income earned nShareholder pays taxes on dividends nEmployees pay income tax nCharter costs/restrictions nGovernment regulations/filings nCost more to create nIncorporate – set a business up as a corp. (expensive!) nDetail the purpose of the business nDo not benefit from losses nMust be applied against future profits nStockholders’ Records nLetters and reports must be sent regularly

19. What is the main benefit of setting up your business as a corporation? Reduced liability

20. Businesses suited to being corporations nBusinesses that require large amounts of capital (airlines, hotels and auto manufacturers) nBusinesses that may have an uncertain future (amusement parks) nWith an uncertain future it adds to the financial risk

21. Organized as a corporation? nVitamins? nNo nNative American Jewelry? nYes nSneakers? nNo nCollector Coins? nYes

22. S-Corporation nAKA Limited Liability Corporation (LLC) nSimilar to a corp. but income is taxed like a partnership nCorp. does NOT pay taxes on its profits nIndividual shareholders are taxed on their profits nLosses may be used as a deduction up to the amount invested nWhy might a business become an S-corp? nLower taxes and limited liability

23. 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 residents

24. FeatureSole Proprietorship PartnershipCorporationS - Corp (LLC) Simple to start √√ Decisions made by one person √ Low initial cost √ Limited liability √√ Limited government regulation √√ Ability to raise capital √√ Double taxation of profits √

25. IssuesSole Proprietorship PartnershipCorporation # of owners1No limit Start-up costsFees for DBA and license Fees fro DBA and agreement Attorney fees for incorp. Documents and filing fees LiabilityOwner liablePartners liables/h liable to amount of investment Life of businessDeath of ownerDeath or separation of partner unless otherwise notes No effect Transfer of interest Owner free to sell Requires consents/h free to sell Distribution of profits Profits go to owner Profits shared based on agreement Paid to s/h as dividends Management control Owner has fullcontrol According to agreement BOD who are appointed by s/h’s

26. SPECIALIZED TYPES OF ORGANIZATIONS nJoint ventures nAn agreement among two or more businesses to work together to provide a good or service nLegal formation is not important nEach partner is expected to bring management expertise or money to the venture nMust be able to adapt quickly to compete effectively nVirtual Corporation – a network of companies that form alliances among themselves as needed to take advantage of fast-changing market conditions nPuma is a great example nOver 80 companies worldwide participate in making and selling the shoes

27. SPECIALIZED TYPES OF ORGANIZATIONS nLimited liability companies (S-Corp) nNonprofit corporations nAn organization that does not pay taxes and does not exist to make a profit nOrganizations that manage cities or schools nUnited Way, SAT, private schools and universities nQuasi-public corporations nA business that is important, but lacks the profit potential to attract private investors, and is often operated by local, state, or federal government nWater and sewer systems or interstate highways (turnpike) nCooperatives nA business owned and operated by its user-members for the purpose of supplying themselves with goods and services nPopular for buying and selling crops (agriculture) nCredit unions, insurance firms, apartments

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