Topic 5 Lesson 3

ECONOMICS TOPIC 5 LESSON 3

ESSENTIAL QUESTION

How can businesses and labor best achieve their goals?

The Characteristics of Corporations

What is a Corporation?

The most complex form of business organization is the corporation. A corporation is a legal entity, or being, owned by individual stockholders, each of whom has limited liability for the firm’s debts. Stockholders own stock, a certificate of ownership in a corporation. 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 1/1000th of the corporation.

Types of Corporations

Some corporations issue stock to only a few people, often family members. These stockholders rarely trade their stock, but instead pass it on, typically within the family. Such corporations are called closely held corporations. They are also known as privately held corporations.

Types of Corporations

A publicly held corporation, however, has many shareholders who can buy or sell stock on the open market. Stocks are bought and sold in financial markets called stock exchanges, such as the New York Stock Exchange or the Tokyo Stock Exchange.

Corporate Structure

While the exact organization varies from firm to firm, all corporations have the same basic structure. The owners—the stockholders—elect a board of directors. The board of directors makes 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.

Open Ended

Categorize In a corporation, who chooses the board of directors, and who chooses the chief executive officer?

Multiple Choice

Summarize A publicly held corporation has

• no legal identity beyond that of its owners.

• many shareholders who can buy or sell its stock.

• a few stockholders who are often family members.

• stockholders who rarely trade their shares of stock.

Advantages of Incorporation

Advantages for Stockholders

The primary reason that entrepreneurs choose to form a corporation is to gain the benefit of limited liability. Individual stockholders 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.

Advantages for Corporations

The corporate structure also presents advantages for 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.

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.

Multiple Choice

Recall How do corporations raise capital?

• by transferring funds from the owners to the investors

• through grants from the board of directors

• by taking out loans against the owners’ assets

• by selling stocks and bonds

Disadvantages of Incorporation

Difficulty and Expense of Start-Up

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 (usually “for perpetuity,” or without limit), founders’ names and addresses, where business is based, method of fundraising, and rules for management.

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. When corporations determine their profits, they often choose to pay a share of those 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. This double taxation keeps many firms from incorporating.

Open Ended

The Internal Revenue Service (IRS) collects taxes from corporations and investors. Analyze Political Cartoons In what sense is this company the “hand that feeds” the IRS?

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. 

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.

Multiple Choice

Identify Supporting Details In order to do business, what is one regulation that corporations have to follow?

• They have to form limited liability corporations.

• They have to have an advisory board that makes financial decisions.

• They have to sell stocks and bonds on the stock exchange.

• They have to file quarterly and annual reports with the SEC.

Corporate Mergers

Corporations may grow by merging, or combining, with another corporation. The three kinds of mergers are horizontal mergers, vertical mergers, and conglomerates.

Horizontal Mergers

In a horizontal merger, two or more firms competing in the same market with the same good or service join together.

Vertical Mergers

In a vertical merger, two or more firms involved in different stages of producing the same good or service join together. A vertical merger can allow a firm to operate more efficiently.

Fill in the Blank

Standard Oil Company grew larger by means of both horizontal and vertical mergers. Infer Which type of merger immediately lessens the number of direct competitors?

Conglomerates

Sometimes firms buy other companies that produce totally unrelated goods or services. When three or more unrelated businesses are involved, this combination is called a conglomerate. 

Multiple Choice

Identify Cause and Effect What is one advantage of a vertical merger?

• It can allow a firm to operate more efficiently.

• It can allow a firm to have a monopoly.

• It can allow a firm to avoid government regulations.

• It can allow a firm to purchase unrelated businesses.

Multinational Corporations

The world’s largest corporations produce and sell their goods and services in more than one country. They are called multinational corporations (MNCs). MNCs usually have headquarters in one country and branches in other countries. Multinationals must obey laws and pay taxes in each country in which they operate.

Advantages of Multinationals

Multinationals 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. Multinational corporations (MNCs) also spread new technologies and production methods across the globe.

Disadvantages of Multinationals

On the downside, many people feel that multinational firms unduly influence the culture and politics in the countries in which they operate. While MNCs do provide jobs, critics say that in poorer countries those jobs are marked by low wages and poor working conditions

Multiple Choice

Identify Supporting Details Which of the following is a potential disadvantage of multinational corporations?

• They sell stocks and bonds in other countries.

• They have an undesired influence on politics and culture in other countries.

• They provide jobs in other countries.

• They spread new technologies to other countries.

Open Ended

How can businesses and labor best achieve their goals?