Corporate Form of Organization

A corporation Business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders. is an entity created by law that is separate from its owners. It has most of the rights and privileges granted to individuals. Owners of corporations are called stockholders or shareholders. Corporations can be separated into two types. A privately held (or closely held) corporation does not offer its stock for public sale and usually has few stockholders. A publicly held corporation offers its stock for public sale and can have thousands of stockholders. Public sale usually refers to issuance and trading on an organized stock market.

Characteristics of Corporations

Corporations represent an important type of organization. Their unique characteristics offer advantages and disadvantages.
Advantages of Corporate Characteristics

• Separate legal entity: A corporation conducts its affairs with the same rights, duties, and responsibilities of a person. It takes actions through its agents, who are its officers and managers.
• Limited liability of stockholders: Stockholders are liable for neither corporate acts nor corporate debt.
• Transferable ownership rights: The transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who control or manage the corporation.
• Continuous life: A corporation’s life continues indefinitely because it is not tied to the physical lives of its owners.
• Lack of mutual agency for stockholders: A corporation acts through its agents, who are its officers and managers. Stockholders, who are not its officers and managers, do not have the power to bind the corporation to contracts—referred to as lack of mutual agency.
• Ease of capital accumulation: Buying stock is attractive to investors because (1) stockholders are not liable for the corporation’s acts and debts, (2) stocks usually are transferred easily, (3) the life of the corporation is unlimited, and (4) stockholders are not corporate agents. These advantages enable corporations to accumulate large amounts of capital from the combined investments of many stockholders.

Point: The business entity assumption requires a corporation to be accounted for separately from its owners (shareholders).
Global: U.S., U.K., and Canadian corporations finance much of their operations with stock issuances, but companies in countries such as France, Germany, and Japan finance mainly with note and bond issuances.
p. 509Disadvantages of Corporate Characteristics

• Government regulation: A corporation must meet requirements of a state’s incorporation laws, which subject the corporation to state regulation and control. Proprietorships and partnerships avoid many of these regulations and governmental reports.
• Corporate taxation: Corporations are subject to the same property and payroll taxes as proprietorships and partnerships plus additional taxes. The most burdensome of these are federal and state income taxes that together can take 40% or more of corporate pretax income. Moreover, corporate income is usually taxed a second time as part of stockholders’ personal income when they receive cash distributed as dividends. This is called double taxation. (The usual dividend tax is 15%; however, it is less than 15% for lower income taxpayers, and in some cases zero.)

Point: Proprietorships and partnerships are not subject to income taxes. Their income is taxed as the personal income of their owners.
Point: Double taxation is less severe when a corporation’s owner–manager collects a salary that is taxed only once as part of his or her personal income.