Characteristics of a Corporation

Throughout this course, our focus has mainly been on a corporation as the business organization. Let's go into a little bit more details about the corporation. So you may have heard of a lot of this stuff before, but let's just go through it real quick. A corporation is a separate legal entity from the owners of the business. Okay, so the corporation is separate from the owners of the business. So let's go through some of the main advantages of setting up as a corporation. And disadvantages, what we hear is advantages, well, they have an unlimited life, right? And this becomes this comes from the easy transferability of ownership, the reason they have unlimited life. Well, think about common stock here, right? The shares of common stock, the ownership is split up into these shares of common stock. So, whoever owns the common stock is an owner of the corporation, and think about any uh, stock on the market, right? Maybe you want to buy shares of Apple stock. Well, that's very easy to do, right? You just go to the stock exchange and you can buy shares of stock from someone willing to sell it. So this transferability of ownership, it's very easy, and it happens all the time, Right? And that has no effect on the day to day business of the corporation, right. If you go and buy a share of stock, that's not gonna go effect what they're doing to run the business itself. And that goes with this last advantage here, is that owners have limited liability for the debts of the business. Okay, And this, the idea here is let's say that you bought shares of Apple stock and now Apple stock gets into a lawsuit and they lose the lawsuit, well, it's not like whoever is going to collect from Apple can come to you personally and knock on your door and say, hey, Apple company lost money, You need to pay us no, Apple Corporation itself is what's gonna pay them and if they run out of money, that's it, that's your limited liability. You don't have to pay anything on top of what you've invested into the business. That's all you're you're liable to lose, is your investment. Okay? So that's that limited liability, which is a huge advantage of a corporation compared to other business organizations. So, let's go through these disadvantages. Real quick one you might have heard of, is this double taxation? So double taxation, That means that corporate owners are taxed twice on their on the earnings. The first one is when the corporation itself pays taxes, right? So if you think about it, the corporation is gonna have their revenue minus expenses, and they're gonna come up with some amount of taxable income, right? So they're gonna be they're gonna pay their taxes on this taxable income over here. Right? So the corporation pays taxes and then when they go ahead and this leftover income, what they pay out to the stockholders as dividends, Well, the stockholders are gonna have to pay taxes when they receive dividends, okay? So when you receive a dividend as the owner of the corporation, you're gonna have to put it on your tax return as earnings and you're gonna pay taxes on it. So there's two taxes the corporation itself, and then the stockholders paying taxes on the dividends received. Okay. Another main disadvantage is there's a lot of government regulation surrounding corporate life forms. And finally, this one can actually be a, a benefit or a loss or a disadvantage is the separation of ownership and management, right? This goes with the, the idea that the owners of the business aren't involved in the day to day operation. So the advantage there is that you don't have to be as an owner, don't have to be business savvy, right? You don't have to be business savvy uh, to invest in a corporation. If you say, hey, I think Apple is gonna do great. And you invest in apple stock. Well, there you go. You don't really have to know the ins and outs of the tech business to own the business and the management you can hire, I guess this would be not business savvy managers can be the business savvy ones, right? And they understand the business, so that sounds like an advantage, but at the same time, it's a disadvantage because you're disconnected from the day to day operation of the business as the owner. You don't really get a say in what's happening in the day to day business and that can be seen as a disadvantage as well. Okay, so this could be kind of a good thing and a bad thing based on how you look at it, Right? So that's about it. For the advantages and disadvantages, let's move on to how we create a corporation and the structure, the the authority structure of a corporation. Let's do that in the next video.

So the creation of a corporation is not some very magical event. It's pretty standard, There's gonna be some paperwork to fill out. So, what we have is we're gonna have the incorporate Urz, which are basically the founders of the company. They're gonna pay some fees, they're gonna sign a charter, they're gonna file some paperwork with the state. So notice that there's gonna be a state of incorporation. So even though the corporation might do business nationwide, or worldwide, there's a specific state where they follow the laws of that state of the corporation. And you see a lot of times, the state of Delaware is one of the main uh, states, that has a lot of corporations have their their headquarters in that state, because they have some of the laxness laws for corporations, so it ends up being the state of incorporation. Okay, so, pretty simple stuff, fill out some paperwork, signed some documents, and then we're going to agree on a set of bylaws. Okay, They're called bylaws. And this is basically the constitution, the rules of the corporation. Whenever there's any sort of issue, we can go to the bylaws and see what the bylaws say for the corporation. For the most part, these are gonna be standard across different corporations. Okay, so let's look at the authority within a corporation right here. So at the top notice that it's the stockholders, the stockholders are the owners, right? They are the owners of the corporation. And what they're going to do is elect the board of directors. Okay, this board of directors, they are the head decision making, um, body of the corporation. It's usually somewhere between 7 to 9 uh people on the board and these are gonna be, you know, executives and people who know the industry and people like the Ceo that might be involved in the day to day operations of the building of the corporation. Excuse me. So the board of directors is gonna elect that chairperson of the board, which will be the Ceo right there and the Ceo and here, the C. O. Chief operating officer. So the chief executive officer, he's kind of like the head of management, right? The Ceo you hear this all the time and then chief operating officer. Well, depending on the size of the corporation, you might have a chief operating officer who then leads a lot a lot of the other managers who lead controllers. And you see it's a kind of a heirarchy throughout the corporation. Here we've got vice presidents after the chief operating officers, the secretaries, the CFO here and then accounting officer and the treasurer. Right? And they're going to have different departments under them as well. So notice at the top here, we do have the owners, the stockholders who are at the top of this, this food chain by electing the board of directors. Okay, by controlling who's on the board of directors, you can control what else is happy in the management of the corporation. Cool. You don't have to know so much about this chart. It's kind of just to show the flow of authority within a corporation. Cool. On the next page, we're going to continue talking about some of some more details about the stockholders themselves. So let's go into that in the next video.

So let's discuss some of the rights of a stockholder. So when you own shares of stock in a company that comes with some rights that you have. So the first one here is voting rights, you have the right to elect the board of directors. So each share, let's say you own one share of stock. Well, that's worth one vote in the in the vote for the board of directors. So you imagine the more shares of stock you have, the more weight you have in electing the board of directors. So that's why someone who owns 50, uh 51 or 75% of a company. Well, they have complete control and they can elect everyone they want on the board of directors. Right? So that's the main thing that the voting rights are for is electing the board of directors, but it comes up for other such things, other important things such as a merger, right? If they're gonna merge companies, usually they take it to the stockholders and and have a vote on on that important, big issues like that. Okay, the next one here is dividends, right? We've talked about dividends before, you have the right to receive dividends and we say you receive your proportionate share, let's say you own 10% of the company, Well you get 10% of the dividends, right? That makes sense. You get your proportionate share of dividends. Same thing with liquidation. So if the company was going to end right, they're gonna say, Okay, it's over here, we're gonna liquidate the company. Well, what they're gonna do is they're gonna pay off all their liabilities, and what's left over is shared between the stockholders, right? You're gonna imagine that they've made some money over the years and what's left over gets paid out to the stockholders at liquidation. Okay. And this is obviously a rare thing. Corporations have that unlimited life, so they tend to have unlimited life and keep on going. You don't see liquidation happen too much unless a stock companies going into bankruptcy or something like that. Okay, And finally, you have this preemptive right? They love to talk about the preemptive, right? Because this is your option to maintain your own proportionate proportionate share when new shares are issued. Okay, So let's say the corporation had, well, let's do it in this example right? Here to show you this preemptive, right? So the idea is that you get to keep your same percentage of ownership when they offer new shares. So johnny clutch clutch owns 1000 shares of the outstanding 100,000 shares of abc company. So there were 100,000 shares of abc company. Johnny clutch owns 1000 of those 100,000. Right? So what was his ownership In in this example? He owned 1000 out of the 100,000 shares? Well, he owned 1% of the company, right? And now ACC Company issues 50,000 new shares, they're going to issue new shares to the public to raise additional capital. So this preemptive, right gives Johnny the option to purchase notice. He doesn't just get free shares or anything, he has 1st 1st right to purchase these shares to keep his proportionate um his proportion of ownership of the company. So since he owned 1% before he should be allowed to still own 1% after this um this new issue of shares. So since there's 50,000 new shares He should be given the right to purchase 1% of them so that he keeps his same owner ownership. So 50,000 times the one That comes out to 500 shares right? 500 additional shares. So notice he doesn't have to purchase these shares, he's just given the right to purchase these shares um through his ownership in the company. So what does this mean? He would be given the right to to purchase uh those 500 additional shares. And notice what happens if he does purchase them? Well now he owns the original 1000 plus the 500 and now the denominator, the total shares outstanding would be the 100,000 plus The 50,000 additional new shares. And we would see that his ownership stays the same. He has 1500 of the 150,000 shares. And that comes out to one Right. So notice he's given the option to keep his same ownership but he doesn't have to, he could just say oh that's okay you can issue the new shares. He's still probably gonna be worth more money because he's got a smaller piece of a bigger pie, that's kind of how you think of it. So let me get out of the way and let's calculate what his ownership would be if he didn't take his preemptive, right? And didn't calculate or didn't keep his 1% ownership. So we'll say this is if he buys them and we'll do doesn't buy them down here, just so you can see, so if he doesn't buy them, well, now he's only got 1000 of the 150,000, right? And what does that come out to as his ownership? Well, it's 1000 divided by 100 and 50,000 in total shares. Well, now his ownership is down to 0.67% of the company, right? If he does not use his preemptive right, remember he doesn't have to they just have to offer him the option to purchase the shares to keep his 1% ownership. Cool, Alright, let's go ahead and move on to the next video