Page 185 - Encyclopedia of Business and Finance

eobf_C 7/5/06 2:57 PM Page 162

Corporations

Corporations may make contracts with either ulation by the individual corporation’s articles of incorpo-
another business or a person. ration and bylaws.
Corporations may hire or discharge employees of any
rank, from entry-level employees to the chief executive State Regulation. Corporations are regulated by business
officer (CEO). corporation laws that exist in all fifty states. Although the
Corporations may borrow money, and they often do statutes prescribe what corporations may and may not do,
so by issuing corporate bonds. Owning a corporate bond they are written in broad and general language. In essence,
does not grant the bondholder any form of ownership in then, the states permit articles of incorporation to be writ-
the company. Instead, corporate bondholders have actu- ten in a manner that permits corporations to engage in
ally loaned money to the corporation, virtually always business for almost any legal purpose.
with a stated interest rate and with terms regarding dates
and methods of repayment. Bondholders may ordinarily Articles of Incorporation. The Articles are filed publicly
sell their bonds to other persons, most often through and are available to the public. They are subject to amend-
stockbrokers. ment. Bylaws are not filed publicly. Consequently, they
tend be more detailed than articles of incorporation.
In addition to issuing bonds, corporations may bor-
row directly from any loan source, such as banks. On
occasion, corporations raise needed cash by authorizing Board of Directors. Members of the board of directors
and selling additional stock. make the major decisions of the corporation. When cor-
porations are formed, they draw up the Articles of Incor-
Corporations may make any lawful investment. They
poration, usually for approval by shareholders. The board
often invest in the stock and/or bonds of other corpora-
tions, personal or real property, mutual funds, money of directors also draws up the initial and ensuing bylaws.
market accounts, certificates of deposit, and government Board members are most often shareholders and offi-
securities. cers of the corporation. They are elected by the sharehold-
ers. They may be “internal” directors or, for reasons of
good public relations or of obtaining of expertise, may
REQUIREMENTS OR LIMITATIONS
work on the “outside” and be selected on the basis of their
OF A CORPORATION
prominent role in the community.
Corporations are subject to risk, to suits, and to income
Policies made by the board of directors are carried out
tax liabilities.
by the corporation’s executives, who direct the work of
employees under their jurisdiction.
Risk. By engaging in business activities, corporations are
at risk, great or small. Profit-seeking corporations may
CLASSES OF STOCK
very well find the large profits they seek. But they risk
Corporations ordinarily have two classes of stock: com-
huge economic losses and even bankruptcy.
mon and preferred. The two classes differ in many respects
but both also share a number of common characteristics.
Suits. Corporations may be sued by any business, includ- There is no limit to how many classes of stock a corpora-
ing other corporations. They may also be sued by individ-
tion may have.
uals or groups of persons.
Common Stock. Common stockholders participate more
Income Tax. Corporations must pay federal and state in the governance of a corporation than do preferred
income taxes on the net profit they make during a calen- stockholders. This is accomplished by giving common
dar or fiscal year. People who receive cash dividends must
stockholders the right to vote for members of the board of
also pay income tax for the year they are received. Thus it
directors as well as on major decisions (e.g., a merger with
is often said that corporation profits are subject to double
another corporation). Common stock, however, can be
taxation. Corporations receive no deduction for any cash
issued without voting rights.
dividends that they pay. Recipients of stock dividends,
Cumulative voting, which permits shareholders to
however, postpone payment of income tax on stock divi- cast one vote for each share of common stock owned in
dends until they sell the stock.
any combination, is prevalent. In an election for members
of the board of directors, for example, a shareholder own-
REGULATION OF CORPORATIONS ing 2000 shares of common stock could cast all 2000
Corporations are subject to two kinds of regulation: regu- votes for one candidate or divide them in any way among
lation by the state in which they are incorporated and reg- candidates (e.g., 400 votes for each of five candidates).

162 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION