30 Sep A Primer on Corporations
The bulk of America’s business is conducted through corporations. Some estimate the number is as high 84% of all business. There are numerous public corporations – those corporations whose stock is traded daily by thousands of shareholders. But most corporations are closely held, and closely held corporations are the primary focus of this article.
They are owned by a few individuals, often members of the same family. Many are very small businesses, the kinds you drive by every day. Stock transfers in these corporations are a rare event usually only triggered only by a sale of the business or an event that requires a shareholder to cash out such as death, disability, bankruptcy, a falling out with others, that sort of thing.
A corporation is a creature of state law. Every corporation is organized under and sanctioned by the laws of the given state. State corporate matters are handled by a separate state division or department that usually is under the auspices of the attorney general’s office of the state.
For legal purposes, a corporation is viewed as a separate being. It can own property, it can sue and be sued, it can enter into contracts, it can borrow money, it can commit a crime or a tort, it must pay taxes. In short, when it comes to property and business, a corporation pretty much has all the rights and liabilities of any human being. A corporation can even have offspring. It can create and own subsidiary corporations which can also spawn their own corporate offspring.
Often this type of multi-tiered holding company structure is used to manage risk exposure by segregating liabilities, to reduce regulatory and tax hassles as the business expands into multiple states or foreign countries, to enhance financing opportunities, to develop and incent management teams, and to help accomplish other key business objectives. As a durable immortal being that can spawn multiple generations, the corporation usually is the best option for housing and operating business that is going to raise capital and take all the risks and hassles of today’s complicated business environment while providing career opportunities and a livelihood to many mortal beings and their families.
This article has only purpose – to help educate all those who want and need more information about corporations. At the end of some of the questions and discussions you may want to pause the article, take a breather while you reflect on a specific point before moving forward. And you may want to go through the article in more than one sitting. The idea is to take it at your own pace. So let’s get started with the questions.
Why are corporations so popular? Corporations are popular because they offer some great benefits. A corporation although legally recognized as a separate being is immortal. It doesn’t die. Its existence can be perpetual. It can outlive all human beings that are tied to it at any point in time. It can span multiple generations. It can raise money by issuing stock to many individuals and institutions while centralizing the control of the entire business in the hands of only a few. Ownership interests in the enterprise can be transferred by just handing over a simple document, a stock certificate without having to impact the assets, liabilities, or operations of the business.
Plus the shareholders of a corporation, those who actually own the enterprise can be insulated from the debts and liabilities of the corporation. That is, their personal assets can be off limits to the corporate creditors. More on limited liability protections shortly.
And on top of all these benefits, a corporation can offer some great tax benefits as we will see. Plus the business and financial communities worldwide understand and accept the preeminent role of corporations. Bottom line, all these features make the corporate structure a must for many businesses.