Video Transcript: Corporations

Okay, welcome back. We're going to discuss corporations. So let's jump right in  nature and classification of a corporation is a creature of statute. It's an artificial  person. Yes, corporations are seen as an entity, as a private individual. There  are statutes in the US Constitution that allow for corporations to be deemed as a person. The dictionary defines Corporation as a number of persons united in  one body for a singular purpose. Recently, the Supreme Court has ruled that  having corporations to spend money in candidate elections or on religious  grounds refuse to comply with federal mandate to cover birth control and  employee health plans. So, so corporation. So this is one thing that the  Supreme Court has recently ruled on, that they cannot allow individuals. I almost want to take that out. I don't know why I put that in there. Can I do that? Yeah,  yeah. I want to take that out. Because I'm like, I just totally jumped from one  thing to the next. I'm like, Why did I even say that? I didn't at all. I was like, that's way too political for me to even talk about. And I don't even not worried about it.  I must have, just when I was putting this in, I must have, oh, this is an Interesting fact or something.  

Welcome back. We're going to discuss corporations. Corporation is a creature of statute or an artificial person. The dictionary defines a Corporation as a number  of persons united in one body for a purpose. Corporations can have more, one  or more shareholders. Owners can be natural persons or other businesses.  Corporation substitutes itself for shareholders. So obviously, a corporation is  going to be made up of multiple people joining one body to create this  corporation, right? And it's going to have one or more shareholders, right? So  we can have somebody that owns all the shares, right? Or we can have multiple people that own multiple numbers of shares, but the Shares represent  ownership stake into that corporation. So owners can be natural people or other  businesses. So when you have a business that merges a business, a lot of  times, they give each other stock of each other's company, right? Or if I want to,  if I want to be on the board of directors of another company, our corporation can  go buy shares of that stock, and now we have ownership rights into that  corporation, and now we have voting rights into that corporation. So the  corporation then substitute itself for the shareholders. In that scenario, a  corporation has constitutional guarantees of free speech, due process and free  freedom from unreasonable search and seizure. Again, we make the reference  back to a corporation being seen as an artificial person by creation of statute in  the US Constitution, they are guaranteed rights the same as a person, right? So  corporation can make free speech about any topic that they want, and they are  allowed to do so, and there's no laws against it. So corporate personnel  responsibility for overall management of the company rests with the board of  directors. They are going to make decisions about growth forecasts, about  maybe the CEO needs to be replaced, or any other upper management 

corporate officials like the CFO or CIO, or anything like that, right? The board of  directors is going to, are going to make those decisions with the best interest of  the corporation as a whole, in mind, board of directors, a group of individuals  elected to represent the stockholders, right? So it's kind of like the Congress,  right? There's a narrow down. There's millions of 300 million people in America,  but we've got 500 people in Congress, so you have a group of representatives  just like stockholders here in corporation example. Boards mandate is to  establish policies for corporate management and make decisions on major  company issues. So they're going so if there's something that a direction that  the company wants to go in, and nobody's sure on which direction, because  both are good, but we don't know what the long term prospects are going to hold for me, the decision the board of directors is going to sit down, they're going to  discuss it, and then they're going to vote, and then that is the direction the  company is going to move in. Every public company must have a board of  directors. Some private and non private organizations also have a board of  directors. So the Board of Directors really helps to help a company not be bound down by one person's ideas or thoughts or biases. They come together for the  collective and make decisions that are best for the shareholders that are going  that is going to maximize the value of their shares, shareholders can sue  corporations. And just like a peep, just like a person, corporations can share,  can sue shareholders. So limited liability of shareholders, one of the key  advantages of corporations is limited liability of owners, right? Just because I  own stock in this company doesn't mean that I am going to lose my personal  assets. If this company does that, now, I may have my share price decrease  because the company's performing poorly, and then that ultimately affects my  overall asset, value of assets, right? It actually decreases. It so. But I'm not  going to lose any money outside of what I what I've invested in this company,  and I'm not going to be held liable if the company goes bankrupt. I'm not going  to be held my personal assets are not going to become after by the debtors or  the government. In certain situations, the corporate veil of limited liability can be  pierced, holding the shareholders personally liable, but that is very far and few  between right you may have to own some preferred shares or something like  that, right to actually have an obligation to the debt, because preferred shares  have a component of debt that is just like debt holders inside of a company. So  like, if the corporation goes bankrupt, those debt holders, those are the ones  that kind of get they go after first, right? So they actually are the ones that are  liable. Shareholders will usually be liable for corporations debt if the cosign, if  they cosigned or personally guaranteed that debt. So with the preferred shares,  I'm getting part ownership stock, and I'm getting a piece of the debt. So that's  what makes them, the preferred shareholders, more liable, but a lot of times  during the chapter seven, chapter 13, they won't come after those preferred  shares, because everything is liquidated and paid off at a negotiated price. 

Shareholders may also be held liable if a creditor can prove shareholders  comingled, personal and business fund. So comingled is, I put my personal  assets into the company, my personal cash, and I mixed it in, right? And then I  dipped into person. I dipped into the business cash, you know, whenever I  wanted to. So if you if a creditor or a government official can prove that you  comingled your personal funds with business funds and treated it kind of like an  account for yourself. Then a lot of times, most probably, if it can be proved that,  proven that you will be held liable for some of that debt, torts and criminal acts.  Corporation is liable for the torts committed by its agents or officers. So it's acts  right, so torts or anything that's unlawful, right? So Corporation is liable for the  things that may be wrong that have been committed by their officers, agents,  employees. Now, corporations now may be on the hook for something like that,  right. Tort is a civil wrong that causes someone else to suffer loss or harm,  resulting in legal liability for the person who commits the tortious act right so the  corporation could be on the line if there is a harassment case, whoever is  harassed can sue the harasser, and also the corporation. Corporations cannot  be held liable for criminal acts, but only fined, however responsible officers may  go to prison. So let's say in the fact of So, if the corporate officers are acting with malicious intent, and they are producing fraud somehow, and the corporation  gets sued, they have to pay the fine while the individuals have or could be liable  to prosecution and fine and jail time, right? So the corporation obviously can't go to jail, but individuals inside the corporation that commit the tortoise act can go  to jail. S corporation. Sub chapter S corporation is a form of corporation that  meets specific internal revenue code requirements. It gives a corporation with  100 shareholders or less the benefit of incorporating while being taxed as a  partnership. So obviously the tax implications, the lower tax implication of being  an S type Corporation, you're actually being taxed as a partnership, not as a  corporation, which, if you notice corporations, you know in the in the previous  tax code was 38% While partnerships are taxed taxes ordinary income, so  probably not going to be taxed as high as the corporations. So so they can avoid that double taxation, right? So when I own dividends into a company before,  before a company disperses the dividends, it's got to be after tax income, and  then when I receive the dividend, I also have to pay taxes on that, whereas, if  you're an S corporation, you avoid the double taxation that is inherent with  dividends of public companies, right? So now I don't have to pay the double  taxation, because now I can distribute dividends out of earnings before interest  in taxes. So that's the critical component to the S corporation, is you have a tax  shelter and kind of converting over to an S corp versus being just a corporation,  and you have definitely tax advantages there. Requirements include being a  domestic Corporation, not having more than 100 shareholders, including only  eligible shareholders, and having only one class of stock most the time,  common, right? You're gonna have too many preferred right? You know only 

have 100 shareholders, so they're probably gonna hold a major portion of that  stock float, right? Corporate financing bonds. They are issued by firms and  governments at all levels. So a lot of times, well, most corporations or  organizations, they have to fund their business, right? So they're going to have  to go to the debt market a lot of times to fund their their organization. If they  have shortfalls, they want to reinvest, if they want to research and develop, they  want to grow their business, they're going to have a debt component  somewhere in their capital structure, right? Corporations do it. Governments do  it. They've got to raise revenue so that they can continue operations and  operation growth, right? So a government bond, just like a corporate bond,  they'll have a maturity date. A maturity date is when the bond comes to  expiration, and then they have to pay back the principal amount of the bond,  sometimes referred to as fixed income securities, because bond holders receive fixed dollar interest payments called coupon payments. So let's say you have  $1,000 bond, 10 year maturity at 10% I'm going to receive $100 a year in  interest off of that $1,000 bond for 10 years. Right? So that coupon payment,  known as the fixed dollar interest payment, will be that 10% $100 payment that I receive annually. Right? A bond indenture is a lending agreement. That typical  banks have that you'll find that you'll sign a loan for real estate project, or you'll  sign a loan for capital equipment, something like that. Corporate financing with  stocks or equities, as it's commonly referred, represents true ownership of a  corporation. So if I own a share of stock, I own a piece of ownership of that  company. I have a piece of ownership in that company provides proportional  ownership interest, reflecting in voting control earnings and assets.  Shareholders receive dividends declared by the board of directors. Now a  dividend is a payment received by shareholders after all other obligations are  paid, including taxes, unless you're a sole proprietorship or an S corp, so you'll  receive the dividend after all other obligations are paid based on a percentage of the stock price in that corporation. Now preferred stock, preferred shareholders  have priority over common shareholders when it comes to dividends, which  generally yield more than common stock and can be paid monthly or quarterly.  Common stock dividends are typically paid quarterly, but preferred stock  dividends can be paid monthly or quarterly. These dividends can be fixed or set  in terms of benchmark, benchmark interest rates like LIBOR. LIBOR stands for  London inter bank offer rate. LIBOR is the rate that banks lend to each other at.  So it's a very small incremental interest rate. So dividends on preferred shares  are usually marked to LIBOR Adjustable Rate shares specify certain factors that  influence the dividend yield. So because there's a debt component to Preferred  stock, the interest rate is going to have a bearing on the dividend yield of  preferred stock. So and so an investor that gets granted, that receives preferred  stock, they are going to have their adjustable, their rates adjusted based on  Treasury bills, which is affected by the treasurer, by the Federal Reserve's 

interest rates, right? So if the interest rates fall, your return on your equity will  increase to give the investor a baseline return. So as interest rates go down for  bonds, your preferred stock piece will go up, and vice versa. If the interest rates  on bonds go up, your preferred return on your equity will go down. To give you a  baseline, let's say 10% corporate financing other venture capital. In a venture  capital deal, large ownership chunks of a company are created and sold to a few investors through independent limited partnerships that are that are established  by venture capital firms. Sometimes these partnerships consist of a pool of  several similar enterprises. So a venture capital, I want to take a risk out on this  market. I think that this is going to perform well, and I want to buy a large chunk  of this, and with a few investors right through a limited partnership. This is called venture capital, right? So we have a few investors wanted to take place and buy  a big chunk of maybe a company or group of organizations that dominate  market share and one industry, private equity capital. Private Equity comes  primarily from institutional investors and accredited events investors. Private  equity capital you'll see a lot of times fund big real estate projects. You'll see a  lot of times private equity come in to help whoever the organization is to fund  that project, right? So not only will they have a bank loan, they'll have equity  come in from private investors that will ultimately receive a return on that capital. One important difference between venture capital and other private equity deals, however, is that venture capital tends to focus on emerging companies seeking  substantial funds for the first time. So with venture capital, we want to make sure that they are looking for a startup to invest in that can capture a lot of market  share and an industry that is maybe underperforming, while private equity tends  to fund larger, more established companies that are seeking to an equity  infusion or chance for company founders to transfer some of their ownership.  stake so they want to kind of maybe the ownership wants to get away from  having so much exposure to this one company, and private equity wants to  come in and buy that exposure up.