Reading: Corporations

Business Management for Every Enterprise

Unit 5

Corporations

Nature and Classification

A corporation is a creature of statute, an artificial “person.”

- The dictionary defines "corporation" as "a number of persons united in one body for a purpose.“

- Recent Supreme Court rulings have allowed corporations to spend money in candidate elections, or on religious grounds, refuse to comply with federal mandate to cover birth control in employee health plans.

- Corporations can have one or more shareholders.

-Owners can be natural persons or other businesses.

- Corporation substitutes itself for shareholders.

-Has constitutional guarantees of free speech, due process, and freedom from unreasonable search and seizure. 

Corporate Personnel

Responsibility for overall management of the company rests with the Board of Directors.

A Board of Directors (B of D) is a group of individuals, elected to represent stockholders. A Board’s mandate is to establish policies for corporate management and make decisions on major company issues. Every public company must have a board of directors. Some private and nonprofit organizations also have a Board of Directors.

Shareholders can sue corporations and be sued by corporations. 

Limited Liability of Shareholders

One of the key advantages of corporations is limited liability of owners (shareholders).

In certain situations, the corporate “veil” of limited liability can be pierced, holding the shareholders personally liable. 

Shareholders will usually only be liable for a corporations debt if the cosigned or personally guaranteed that debt. 

Shareholders may also be held liable if a creditor can prove shareholders comingled personal and business funds.    

Torts and Criminal Acts

Corporation is liable for the torts committed by its agents or officers.

- Tort: a civil wrong that causes someone else to suffer loss or harm resulting in legal liability for the person who commits the tortious act. 

Corporation cannot be liable for criminal acts, but only fined. However, responsible officers may go to prison 

S Corporation

A Subchapter S (S Corporation) is a form of corporation that meets specific Internal Revenue Code requirements, giving a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. The corporation can pass income directly to shareholders and avoid the double taxation that is inherent with the dividends of public companies, while still enjoying the advantages of the corporate structure. Requirements include being a domestic corporation, not having more than 100 shareholders, including only eligible shareholders and having only one class of stock.

Corporate Financing: Bonds

Issued by firms and government at all levels.

- Normally have a maturity date – when principal is returned to investor.
- Sometimes referred to as fixed income securities, because bondholders receive fixed-dollar interest payments.
-Bond indenture: lending agreement  

Corporate Financing: Stocks

Common stock – Represents true ownership of a corporation. Provides proportional ownership interest reflected in voting, control, earnings and assets. Shareholders receive dividends declared by the Board of Directors.

Preferred stock - Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. These dividends can be fixed or set in terms of a benchmark interest rate like the LIBOR​. Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company's profits.

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 established by venture capital firms. Sometimes these partnerships consist of a pool of several similar enterprises.

Private Equity Capital -  Private equity comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods. In most cases, considerably long holding periods are often required for private equity investments

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 , while private equity tends to fund larger, more established companies that are seeking an equity infusion or a chance for company founders to transfer some of their ownership stake.