Overview
This lecture explains the structure, creation, advantages, and disadvantages of corporations, focusing on C corporations as the most common type.
Introduction to Corporations
- Corporations are a popular business ownership form, especially for large businesses with high annual sales.
- The term "corporation" usually refers to a C corporation, the most common type.
- Corporations are distinct legal entities, separate from their owners.
Formation of Corporations
- To establish a corporation, founders must file Articles of Incorporation in their chosen state.
- Delaware is a popular state for incorporation due to favorable corporate laws.
- Articles of Incorporation include basic information: company name, number of shares, board members, and company location.
- Corporate bylaws are a separate, more detailed document outlining daily operational rules and management procedures.
Structure and Key Players
- Stockholders (owners) buy shares, representing ownership in the corporation, and have voting rights, mainly to elect the board of directors.
- The board of directors represents shareholders' interests and sets company mission and goals but does not manage daily operations.
- Corporate officers (e.g., CEO) are appointed by the board to handle day-to-day management and operations.
Advantages of C Corporations
- Limited liability protects stockholders, who can only lose their investment and not personal assets if the corporation fails.
- Corporations have permanence; they continue to exist even if owners change or pass away.
Disadvantages of C Corporations
- Double taxation occurs: profits are taxed at the corporate level, and dividends paid to shareholders are taxed again as personal income.
- Formation and maintenance are expensive and complex due to required legal documents, fees, and regulatory compliance.
Key Terms & Definitions
- C Corporation — a type of corporation taxed separately from its owners with common use among large companies.
- Articles of Incorporation — a document establishing the basic outline and existence of a corporation.
- Corporate Bylaws — internal rules detailing management processes and board responsibilities.
- Stockholder — someone who owns shares of a corporation and has voting rights.
- Board of Directors — a group elected to oversee the corporation and represent shareholders' interests.
- Corporate Officers — individuals (like the CEO) responsible for daily management of the corporation.
- Limited Liability — protects owners from being personally responsible for corporate debts.
- Double Taxation — the process of taxing corporate profits and shareholder dividends separately.
- Dividend — a payment made to shareholders from corporate profits.
Action Items / Next Steps
- Review the structure and key documents required for corporations.
- Understand the tax implications and regulatory requirements for C corporations.
- Compare corporations with sole proprietorships and partnerships for your next assignment.