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.