Running head: CORPORATE CHARACTERISTICS PROPOSAL

Corporate Characteristics Proposal Shawna Novak, Genie Mulari, Patience Harper, Robert Moore, Sonya Moller ACC/281 February 7, 2011 Carol Collet

CORPORATE CHARACTERISTICS PROPOSAL

Corporate Characteristics Proposal In the business world of today in both the United States and around the world there exist many different forms a business can be based upon. Each of these forms have unique characteristics and differing regulations. Additionally, each of these forms has differing ways in which they may raise capital and fund themselves. The form a business undertakes comes with its own advantages and disadvantages and should be catered to with specific regard to the type of business that it will participate in. It is the purpose of this proposal to describe these different forms of business, particularly that of the corporation and its inherit characteristics regarding equity funding in the form of stocks as well as advantages and disadvantages that come with doing business in the corporate form. The Different Forms of Business Organizations Different forms of business entities exist and knowing the advantages and disadvantages of each can assist start-up business ventures by identifying the entity that will be the most beneficial to profitability and growth. The types of business organizations are proprietorship, partnerships, limited liability companies, and corporations. The easiest and most common form of business venture to start is proprietorship. A proprietorship has one owner who is responsible for all liabilities and profits the company incurs. A proprietorship has inexpensive start-ups costs, but the owner is personally liable for the business and its debts; taxes are filed as one unit where the proprietor files taxes for the business personally. Partnerships have two or more individuals and are run similar to a proprietorship. Partnerships are also inexpensive to start-up and are generally started by conducting a written or oral contract. The partners are responsible for the liabilities of the company like that of a

CORPORATE CHARACTERISTICS PROPOSAL

proprietor. The partners are taxed as with proprietorships called pass-through taxation. This avoids the business entity and the partners to be double-taxed. A limited liability company (LLC) has the advantages of corporations and partnerships. A limited liability company begins with filing with the Secretary of State. The number of owners is a decision by the business. Once the company files with the Secretary of State, they must file an Operating Agreement that outlines who the owners are and the details of how the company is operated. The profits and losses of the company are outlined in the Operating Agreement. The owners decide how the profits and losses will be allocated. The Operating Agreement also outlines how the company will choose to be taxed. A LLC has the option to use pass-through taxation or to be taxed as a separate business entity like that of a corporation. One caveat to the LLC regarding taxation is that it is required to pay a minimum tax regardless of profit or loss which some see as a disadvantage to the LLC. A corporation is a separate legal entity distinct from its owners. A corporation incurs all debts, assets, legalities, and contracts of the company. A corporation is an expensive business venture that begins with an application filed with the Secretary of State. Once the application is accepted, a charter is issued. It is the issuance of the charter (that) creates the corporation (Weygandt & Kimmel, 2008, p. 538). Once the corporation has been created by-laws are created that govern the procedures and policies of the company. A company issues stock as proof of ownership as well as to raise capital for the corporation. Because a corporation has many owners it can have unlimited life. The stockholders of the company elect a board of directors who in turn elect managers and directors to the corporation. Additionally, the board is determines when dividends are issued. Because a corporation is a publicly owned company, it has to comply with numerous laws and regulations of the state and federal government. Corporations have to

CORPORATE CHARACTERISTICS PROPOSAL

disclose their financial statements with the Securities Exchange Commission (SEC) and comply with the Sarbanes-Oxley Act. One key disadvantage is the so called double tax that corporations are faced with. This double tax is so called because after the corporation files its taxes it distributes dividends from retained earnings. These dividends are subject to taxation and since these dividends come from profit net tax they are seen as a double tax of profits. The Characteristics of Corporations A corporation is distinct from partnerships and proprietorships in that it is a separate legal existence, meaning a corporation conducts business under its own name separate from its owners while maintaining the ability to buy, own, and sell property. A corporation may also borrow funds, enter legally binding contracts, pay taxes, and sue, or be sued. The same legal rights and privileges bestowed upon individuals are provided to corporations except for the ability to vote or hold public office. Owners of a corporation are not bound to the companys obligations as in partnerships and proprietorships. As an alternative, stockholders of a corporation retain limited liability. Each stockholder is only responsible for the individual amounts which they each have invested into the corporation and are not bound by agents actions. A corporation may acquire capital by issuing an unlimited amount of shares of stock to investors. As an added benefit and security, stockholders reserve the right to transfer ownership rights simply by selling shares of capital stock without the consent of each owner. Similarly, a corporation does not rely on its owners for existence, as a result; even if an owner dies a corporation may have a continuous life depending upon the statutes of the state in which it is incorporated (Weygandt, Kimmel & Kieso, 2008, p. 534). Although stockholders legally own

CORPORATE CHARACTERISTICS PROPOSAL

corporations they do not make decisions regarding the day-to-day operations. Instead a board of directors is elected to make these decisions on their behalf. In addition, corporations are required to follow numerous state and federal regulations as well as pay additional taxes. Corporations are separate and distinct from its owners; therefore, a corporation is obligated to pay its own taxes whereas partnerships and proprietorships report company earnings on personal income taxes. Another unique characteristic of corporations is that they may issue different types of stock. The Different Types of Stocks Issued by Corporations There are three different types of stock that a corporation can issue. They are common stock and preferred stock. Selling shares of stock for the corporation is an easy way to acquire capital for the new business venture. Common stock gives the owners of the stock, ownership rights of the business. These ownership rights are outlined in the articles of incorporation or bylaws. Some ownership rights are rights to receiving dividends, voting rights and liquidation rights. Common stockholders own a part or share of the company. In most cases common stockholders receive one vote, to pick the board of directors, per share that they own. Owners of common stock also have a claim, otherwise known as dividends, on the companys earnings but they are not guaranteed this dividend as the sole ability to declare dividends rests with the board. During liquidation of a business the common stockholder is in line for a claim on the leftover assets after debt holders and preferred stockholders. A preferred stockholder does have some ownership rights to the company, but not usually as much as a common stockholder. They do not usually have voting rights either. However, preferred stockholders are guaranteed dividends and depending on the types of preferred stock are paid in arrears for any years when the company was not able to pay dividends. This is not so

CORPORATE CHARACTERISTICS PROPOSAL

for common stockholders. Preferred stockholders are paid dividends before common stockholders. Common stockholders get what is left over, if any, after the preferred stockholders are paid. When the business is liquidated after the debt holders are paid the preferred stockholders get their portion of the remaining assets. Whatever assets are left over after that is what gets paid to common stockholders. The par value of stock is a price that is set for the issue of stock. Stock can be sold at, above or below par value. The price that a stock sells at is the market value. Market value is the value per share that is determined by the supply and demand of stock purchases and sales. When stock is sold below par value the company has to show the paid in capital or the difference between the par and market value. When stock is sold above the par value the company recognizes the paid in capital in excess of par. When and if the company has to buy back any of the issued stock it is then called treasury stock. The Advantages and Disadvantages of Corporations Structuring a company as a corporation can have advantages and disadvantages. The advantages of a corporation include operating as a separate entity, continuous life, and the ability to raise capital through issuing stock. Operating as a separate entity is an advantage because the corporation may enter into contracts or create liabilities, but the owners are not held personally responsible for the actions of the corporation. Continuous life is beneficial because as owners change the company will not need to reorganize and there is no interruption. A corporation regardless of the owners can continue to do business as long as their charter is effective. Death, prison, or change of ownership does not affect the life of the company. Last the ability to raise capital through the issuance of stock helps the corporation have the funds to grow steadily without incurring additional debt.

CORPORATE CHARACTERISTICS PROPOSAL

Disadvantages of organizing as a corporation include government regulation, additional taxes, and separation of ownership from management. Most government regulations apply to the issuance of stock. A company will invest a considerable amount of time and resources to ensure that they accurately disclose the proper information to the Security Exchange Commission and on their financial statements in a timely manner. Another disadvantage is the double taxation of a corporation. The income from a corporation is taxed as well as the stockholders paying taxes on the dividends they receive. Corporations also pay a higher tax rate than is paid on personal income tax. The separation of ownership from management also can be a disadvantage. Stockholders or owners are often not involved in the day to day operations of the company, yet they can vote on major changes that could change how the company operates. If they do not know the business well or heed the advice of the professionals that work for them it could be disastrous for the business. Conclusion As explained above each business form has its own unique characteristics and differing regulations. Of the differing forms, corporations are distinct as they are regulated as a separate entity apart from their owners and have the advantage of raising capital through the issuance of stocks or bonds. However, the corporate form of business comes with its own advantages and disadvantages as noted above and should be carefully considered. Those enterprises which may require large sums of capital should consider the corporate form. The limited liability to its owners allows this capital to be raised without individuals being held personally liable for the debts which may occur. If large amounts of profits are expected but in turn will require large amounts of capital startup it is the opinion of these authors that the corporate form of business is best suited for the venture.

CORPORATE CHARACTERISTICS PROPOSAL

References Weygandt, J. J., Kimmel, P.D., & Kieso, D.E. (2008). Financial Accounting (6th ed.). Hoboken, NJ: John Wiley & Sons, Inc.