Corporation

I

Introduction

Corporation, organization created by a government charter that allows people to associate together for a common purpose under a common name. The charter gives the corporation certain privileges, including the right to buy and sell property, enter into contracts, sue and be sued, and borrow and lend money. In the United States, state governments charter most corporations.

Although corporations account for only about 20 percent of all businesses in the United States, they generate about 90 percent of all business income. Most other businesses are either sole proprietorships, owned by one person, or partnerships, owned by a small group of people. Unlike the owners of corporations, the owners of proprietorships and partnerships are usually involved in the daily operations of the business.

II

Kinds of Corporations

Corporations can be public or private. Public corporations are usually created by municipalities, such as cities, towns, and villages, to carry out such governmental functions as collecting taxes, enforcing ordinances, and raising capital through the sale of bonds. National governments may also organize public corporations to undertake specific objectives that may be too hazardous, too large, or unprofitable for private enterprises. For example, the U.S. government created the Tennessee Valley Authority in 1933 to develop power, control floods, and provide irrigation along the Tennessee River.

Corporations that are not government agencies are called private corporations. Some private corporations are founded and owned by an individual or a small group of individuals. Typically their stock is not for sale to the general public. These companies are sometimes referred to as privately held. Other private corporations are owned by many individuals. The general public can purchase their stock on a stock exchange, such as the New York Stock Exchange. These companies are sometimes referred to as publicly traded or publicly held companies. The largest businesses in the United States, Canada, and many other countries operate as publicly held corporations.

---

---

Corporations are known as joint-stock companies because they are jointly owned by different persons who receive shares of stock in exchange for an investment of money. Corporations often issue two types of stock, common stock and preferred stock. Each share of common stock entitles the owner to one vote on decisions made by stockholders. Common stockholders usually must approve changes in corporate policy, such as an amendment of the corporate charter. Common stockholders share in the corporation’s profits. Corporations either distribute these profits to the stockholders in the form of dividends or reinvest them in the corporation, thus increasing the value of the shareholders’ investment. Common stockholders also elect the board of directors. The board of directors determines basic corporate policy and selects the top officers of the corporation, such as the chief executive officer, to manage operations. The law imposes a duty on the officers and directors to run the corporation in the best interests of the stockholders, and stockholders can bring legal suits against them. If a majority of stockholders are dissatisfied with the management of a corporation, they can vote out a board of directors and bring about a change in management.

Some corporations issue preferred stock in addition to common stock. If a company discontinues business and liquidates its assets, holders of preferred stock receive any proceeds before holders of common stock. Preferred stock dividends are usually set at a fixed rate and must be paid before the corporation distributes common stock dividends. However, preferred stock usually does not confer voting rights.

A corporation may also raise money by selling bonds. Bondholders lend money to the corporation and thus are creditors, not owners, of the corporation. They receive interest on their loans to the corporation, and the loans must be repaid at the end of a fixed period.

III

Advantages and Disadvantages

Organizing as a corporation offers a business certain advantages. The owners of a corporation enjoy limited liability—that is, they are not liable for the corporation’s debts. If the corporation discontinues business, its creditors have a claim only on the assets of the corporation, not on the personal assets of its owners. Another advantage of a corporation is its ability to raise vast amounts of capital. By issuing stock, a corporation can enable thousands of individuals to pool financial resources and invest in a new venture. This also spreads the risk of financial loss among many people.

There are also disadvantages to organizing as a corporation. Forming a corporation involves a number of expenses, including the cost of securing the charter, fees to do business in states where the business is not incorporated, and other legal expenses. Corporations are also subject to more government regulation than sole proprietorships or partnerships. In particular, the government carefully examines the way in which corporations file their financial reports, sell stocks or bonds, and merge or consolidate their holdings with those of other firms.

Corporations date back to the Middle Ages, a period in European history dating from about the 5th century to about the 15th century. The earliest corporations were used to organize universities, monasteries, and guilds. In the 16th and 17th centuries, governments used corporations to organize voyages of exploration and discovery. In the early 17th century, the English crown granted charters to joint-stock corporations giving them authority to govern and to engage in trade in the American colonies. After the United States gained its independence in 1776, states were given the power to grant corporate charters. In 1811 New York became the first state to pass a law outlining the procedure for becoming a corporation, and the other states soon followed. The corporation was well suited to meet the demands of the Industrial Revolution, which generated a tremendous increase in the number of business opportunities that required large amounts of financial capital. By the 20th century, the corporation was the dominant type of business organization throughout the world. See also History of United States Business.

	More from Encarta
	•  Presidential Myths Quiz •  Coffee break: Recharge your brain