BANGLADESH UNIVERSITY

CSE-1106: Business Organization

Course Teacher: Md. Hasan Talukdar
Forms of Business Ownership
Lecture-8
CORPORATIONS
Some industries, such as automobile manufacturing, computer manufacturing, oil refining, and
natural gas production, require millions of dollars to operate a business. Typically, such vast
sumsof money are put together by attracting numerous investors. The unincorporated forms of
business the proprietorship and the partnership do not attract investors who do not want to make
decisionsor to be involved in managing the firm. The corporation, by contrast, provides a form
of business ownership in which owners spread over a wide geographical area can hire
professional managersto operate the business. In the eyes of the law, the corporation is an
artificial being, invisible and intangible. It has the legal rights of an individual: it can own
property, purchase goods, and services, and sue other persons or corporations.

ADVANTAGES OF A CORPORATION
The power and presence of corporations in American business suggest that this form has certain
advantages over other forms of business ownership:
Limited liability
A person investing funds in a corporation receives shares of stock and becomes an owner. In a
corporation, the liability for the shareholder equals the amount of funds invested. Thus, if the
business is forced to liquidate, each owner loses only the amount of money he or she has
invested.

The skilled management teams

The board of directors has the duty of hiring professional managers, and the owners delegate
theirpower of operating the business to these managers. Professional managers are trained and
experienced career executives. They may own shares of stock in the business but usually not
enough to control the corporation.

Transfer of ownership

Shareholders have the right to sell their shares of a corporation's stock to whomever they please,
barring a legal restriction on some closed corporations. These shares of ownership can be sold
whenever the shareholder desires and at the price, the buyer is willing to pay. Thus,
shareholders can freely buy and sell shares of stock. The investment flows easily and is not
frozen. This right to sell shares of stock gives corporations the ability to attract large numbers
of shareholders.

Greater capital base

As previously stated, the size of a proprietorship or partnership is limited to the amount of

capital that one or several people have available and are willing to invest. Corporations,
however, can attract capital from a large number of investors by selling shares of stock.

Stability

State law varies, but a corporation can usually be chartered to operate indefinitely.
Shareholders' deaths, retirement, or sale of stock need not dissolve the business. The
corporation's policies maybe altered by the sale of large blocks of stock, but the business will
go on. Nor will the death or retirement of the president of the board or the chief executive
officer stop the corporation from doing business.

Legal-entity status

A corporation can purchase property, make contracts, or sue and be sued in its corporate name.
These characteristics distinguish it most clearly from other forms of business organization. As
Justice Thurgood Marshall of the U.S. Supreme Court stated, a corporation is an artificial
being."This legal status allows the shareholders to have limited liability.

DISADVANTAGES OF A CORPORATION

As was true with the other forms of business organization, the corporation has some
disadvantages.Some of the more obvious ones follow.

Difficulty and expense of starting

Starting a corporation involves applying for a charter from a state. Each state has its own set
of laws; these must be considered before deciding where to incorporate. An attorney should be
hiredto complete legal forms. Attorney fees and state charter fees must be paid. The chosen
state then reviews the application and issues a charter that specifies various restrictions on
operations.

Lack of control

The individual shareholder has little control over the operations of the corporation except to
vote for a slate of individuals for the board of directors. The buying and selling of shares of
stock is theonly real control an owner has.

Multiple Taxation

In addition to an annual franchise tax in the state of incorporation, an annual payment is

requiredby most states for the right to operate as a corporation. No such fees are charged to a
proprietorshipor partnership. Some states levy a corporate income tax on those monies earned
within the state. The taxes are at lower rates than federal taxes. At the federal level, the
corporation has to pay taxeson its profits. The shareholders must also pay income tax on the
dividends they receive through ownership. This practice of taxing corporate income and
dividends is referred to as double taxation.

Government involvement

State and federal governments have the right by law to exercise certain controls on and to
requirecertain reports from, businesses. For example, a corporation cannot conduct its business
in a statein which it is not registered. As mentioned previously, a corporation organized under
the laws of one state or country is called, within that state or country, a domestic corporation.
When such a business operates in another state or country, it is called a foreign corporation.
Foreign corporations doing business in several states must obtain a certificate of authority from
each. Some states require a foreign corporation to deposit bonds with the state treasurer to
protect anyone whomight suffer loss because of some action by the corporation.

Lack of secrecy

A corporation must provide each shareholder with an annual report. In a closed corporation,
the few reports circulated usually won't get into the hands of nonowners. But when a large
number ofreports are issued, the reports become public knowledge. These reports present data
on sales volume, profit, total assets, and other financial matters. Public disclosure of these data
enables competitors and other outsiders to see the corporation's financial condition.

Lack of personal interest

In most corporations except the small ones, management and ownership are separate. This
separation can result in a lack of personal interest in the success of the corporation. If the
managersare also shareholders, the lack of personal interest is often minimized. It is assumed
that employeeswho are also owners will work harder for the success of the business, but the
accuracy of this assumption is an individual matter. Most managers have pride in their work and
want any businessthey are involved with to succeed.

Credit limitations

Banks and other lenders have to consider the limited liability of corporations. If a corporation
fails,its creditors can look only to the assets of the business to satisfy claims. For partnerships,
the creditors can rely on the personal assets of the partners to pay off business debts.

References:

Steven J. Skinner and Johm. M. Ivancevich, Business for the 21st Century, (Latest edition),
IRWIN, IL. USA