Chapter 8:3 Corporations

• We will examine the characteristics of corporations.

• We will analyze the advantages of incorporation.

• We will analyze the disadvantages of incorporation.

• We will compare and contrast corporate combinations.

• We will describe the role of multinational corporations.

Eph_1:10 That in the dispensation

of the fulness of times he might

gather together in one all things in

Christ, both which are in heaven,

and which are on earth; even in

him:

Corporations:

• The most complex form of business organization is the corporation.

• A corporation is a legal entity being owned by the individual stock holders.

• Each of whom has limited liability for the firm’s debts.

• Stockholders own stock, a certificate of ownership in a corporation.

Corporations:

• Each person who owns stock is a part-

owner of the corporation issuing it.

• If a corporation issues 1,000 shares of

stock and you purchase 1 share, you

own 1/1000 of the corporation.

• Sole proprietorships have no identity

beyond that of the owner.

Corporations: • A corporation on the other hand does have a

legal identity separate from the identity of the owner.

• Legally it is regarded much like an individual.

• A corporation may engage in business, make contracts, sue other parties or be sued by others and pay taxes.

• Corporations generate more than 80 percent of sales and generate nearly 60 percent of net income earned in the nation.

Types of Corporations: • Some corporations issue stock to only a few people,

often family members.

• These stockholders rarely trade their stock, but pass it on, typically within the family.

• Such corporations are called closely held corporations.

• They are also known as privately held corporations.

• A publicly held corporation has many shareholders who can buy or sell stock on the open market.

• The stocks are bought and sold in financial markets called stock exchanges such as the New York Stock Exchange.

Corporate Structure: • All corporations have the same basic structure.

• The owners the stockholders elect a board of directors, the board of directors make all the major decisions of the corporation.

• It appoints corporate officers, such as the chief executive officer or president.

• These officers run the corporation and oversee its operations.

• Corporate officers in turn hire managers and employees, who work in various departments such as finance, sales, research, marketing, and production.

Corporate Structure: • Advantages of Incorporation:

Advantages of corporations include

limited liability for owners,

transferable ownership, ability to

attract capital, and long life.

• Advantages for Stockholders: The

primary reason that entrepreneurs

choose to form a corporation is to

gain the benefit of limited liability.

Corporate Structure: • Individual stock holders do not carry

personal responsibility for the

corporation’s actions.

• They can lose only the amount of money

they have invested in the business.

• If a corporation is sued and loses the

case, it must pay the money award but

the assets of individual stockholders

cannot be touched.

Corporate Structure: • Corporations usually also provide

owners with more flexibility than other forms of ownership.

• Shares of stock are easily transferable.

• Stockholders can easily sell their stock to others and get money in return.

• This is not the case with other forms of business organizations.

Advantages for the Corporation: • The corporate structure also

presents advantages of the firm itself.

• Corporations have more potential for growth than other business forms.

• By selling shares on the stock market, corporations can raise large amounts of capital.

Advantages for the Corporation:

• Corporations can also raise

money by borrowing it.

• They do this by selling bonds.

• A bond is a formal contract

issued by a corporation or other

entity that includes the promise

to repay borrowed money with

interest at fixed intervals.

Advantages for the Corporation: • Because ownership is separate from the

running of the firm, corporate owners that is, stockholders do not need any special managerial skills.

• Instead, the corporation can hire various experts, the best financial analysts and experts, etc.

• Corporations also have the advantage of long life.

• Because stock is transferrable, corporations are able to exist longer than simple proprietorships or even partnerships.

Disadvantages of Incorporation: • Difficulty and Expense of Startup:

Businesses that wish to incorporate must first file for a state license known as a certificate of incorporation, or corporate charter.

• The application includes crucial information such as corporate name, statement of purpose, length of time that the business will run, founders names and addresses, where the business is based, method of fund raising, and rules for management.

Disadvantages of Incorporation: • Once state officials review and

approve the application they grant the corporation its charter.

• Then the corporation organizes itself to produce and sell a good or service.

• Corporate charters can be difficult, expensive, and time consuming to create.

Disadvantages of Incorporation:

• Double Taxation: The law considers

corporations legal entities

separate from their owners.

• Corporations, therefore must pay

taxes on their income.

• Corporate earnings are taxed a

second time as well.

Disadvantages of Incorporation:

• When corporations determine their profits, they often choose to pay a share of their profits to stockholders in payments called dividends.

• These dividends count as income for the stockholder, and the stockholder must pay personal income tax on them.

• The double taxation keeps many firms from incorporating.

Disadvantages of Incorporation:

• When stockholders sell shares, they must compare the selling price of how much they paid for them.

• If the selling price is higher than they earned, it is called a capital gain.

• That gain is also taxed.

• Some owners form limited liability for owners, which all corporations enjoy.

• They also have tax advantages because the firm does not pay corporate income tax.

Disadvantages of Incorporation:

• Loss of Control: The original owners of a corporation often lose control of the company.

• Corporate officers and boards of directors, not owners, manage corporations.

• These managers do not always act in the owner’s best interest.

• They might be more interested in protecting their own jobs or salaries today than in making difficult decisions that would benefit the firm tomorrow.

Disadvantages of Incorporation:

• More Regulation: Corporations face more regulations than other types of businesses.

• They must hold annual meetings for stockholders and keep records of all business transactions.

• Publicly held corporations are required to file quarterly and annual reports with the Securities and Exchange Commission (SEC).

• The SEC is a federal agency that regulates the stock market.

Corporate Combinations:

• Corporations can grow very large.

• One way to grow is to raise money

by selling stocks or bonds.

• Corporations may also grow by

merging, or combining with another

corporation.

Corporate Combinations:

• Horizontal Mergers: joining of two or

more firms competing in the same

market with the same goods and

service.

• For example: Cingular and AT & T.

Corporate Combinations: • Vertical Mergers: Joining of two or more firms

involved in different stages of producing the same good or service.

• A vertical merger can allow a firm to operate more efficiently.

• A vertically combined firm can control all phases of production, rather than relying on the goods or services of outside suppliers.

• Sometimes firms take this step out of fear that they may otherwise lose crucial supplies.

Corporate Combinations:

• Conglomerates: Sometimes firms merge with other companies that produce totally unrelated goods or services.

• When three or more unrelated businesses are involved, these combinations are called conglomerates.

• In a conglomerate, no one business earns the majority of the firm’s profits.

• The government usually allows this kind of merger, because it does not result in decreased competition.

Corporate Combinations:

• Multinational Corporations: The world’s largest corporations produce and sell their goods and services in more than one country.

• They are called multinational corporation (MNCs).

• MNCs usually have headquarters in one country and branches in other countries.

• Multinationals must obey laws and pay taxes in each country where they operate.

Corporate Combinations:

• Additional Multinationals: They benefit consumers and workers by providing jobs and products around the world.

• Often the jobs they provide help people in poorer nations enjoy better living standards.

• MNC’s also spread new technologies and production methods across the globe.

Corporate Combinations:

• Disadvantages of Multinationals: On

the downside, many people feel that

multinational firms only unduly

influence the culture and politics in

the countries in which they operate.

• While MNC’s do provide jobs, critics

say that poorer countries where

they are located are marked by low

wages and poor working conditions.

• “The centralizing of wealth and power; the vast combinations for the enriching of the few at the expense of the many; the combinations of the poorer classes for the defense of their interests and claims; the spirit of unrest, of riot and bloodshed; the world-wide dissemination of the same teachings that led to the French Revolution--all are tending to involve the whole world in a struggle similar to that which convulsed France.” {Ed 228.2}

o MSNBC.COM Jan 11, 2011

o By Allison Linn

o More Americans are seeing a significant rift between rich and poor people, with most people saying there is a strong or very strong conflict between those who are wealthy and those who are not. A survey released Wednesday by Pew Social & Demographic Trends finds that 66 percent of Americans see strong or very strong conflicts between rich and poor people. That’s a 19 percentage point increase over 2009.... The strife between rich and poor people is now seen as a bigger issue than other social conflicts, including conflict between immigrants and native-born Americans and tension between black and white Americans, according to the Pew study.

Discussion Questions

• Do you think Multi-National Corporations are

beneficial to society or do you think that

government should make laws to restrict the

power of these businesses?

• Are you willing to pay more for prices of

products you purchase that are made overseas

so workers could have better conditions?