Chapter 8, Section 3: Corporations, Mergers, and Multinationals

By: Daryss Calveiro, Claudia Vera, and Maria Zapata

Corporations

What is a corporation?

• A corporation is a legal entity that is separate and distinct from its owners. A corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes

What are the advantages of corporation?

• Limited liability: Since a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for

satisfying corporate debts or liabilities.

•Corporate tax treatment: Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any

profits

•Attractive investment: The built-in stock structure of a corporation makes it attractive to investors.

What are the disadvantages of a corporation?•Double tax

• Formalities: The proper corporate formalities of organizing and running a corporation

must be followed, to receive the benefits of being a corporation.

Remember: A corporation is defined as an entity because it has the legal identity separate from those of its owners. Legally, it is regarded much like an individual.

Incorporations

• An incorporation is the creation of a corporation.

What are the disadvantages of incorporation?

1. Difficult and expensive startup

2. Double Taxation

3. Loss of control: original owners of corporation often lose control of the company because managers and board of directors are the ones who manage the corporation.

4. More regulation: Must hold annual meetings for shareholders and keep careful records of all business transactions.

Remember: A bond is a formal contract to repay borrowed money with interest at fixed intervals.

Corporate Combinations

• As corporations grow, managers and owners may decide It makes sense to merge the firm with other companies, forming a corporate combination.

• Horizontal Mergers: the combination of firms competing in the same market with the same good or service.

• Vertical Mergers: combination of firms involved in different stages of producing the same good or service.

• Conglomerates: business combination merging more than three businesses that make unrelated products. Every firm gets equal profit and it does not result in decreased competition.

The three types of corporate combinations:

Multinational Corporations

A multinational corporation (MNC) is a large corporation that produces and sells its goods and services throughout the world. Multinational corporations are also known as “transnational corporations” and must obey laws and pay taxes in each country in which they operate.

• Examples of multinational corporations are McDonalds and Kodak.

Advantages of Multinational Corporations?

• Provide jobs and products around the world.

• Spread new technologies and production methods across the globe

Disadvantages of Multinational Corporations?

• Low wages and poor working conditions provided by MNC’s in some poorer countries.

Trends suggest that MNC’s will become increasingly visible and important in the world economy in the future.