Corporation

Corporation, group of persons regarded as a legal entity apart from the individuals owning or managing it. As a legal person, a corporation can hold property and sue and be sued. Corporations may be either private or public. The corporate form of business organization has at least 4 advantages. (1) It safeguards its owners, relieving them of legal responsibility as individuals when they act as agents of the business. (2) The owner of shares of stock has limited liability, that is, cannot lose more money than invested and has no personal responsibility for the debts of that “person,” the corporation. (3) Corporate stock is transferable. The corporation is not damaged by the death or lack of interest of a particular person. (4) The corporation can raise large amounts of capital by selling stock. The corporate form of organization has some disadvantages for the investor or manager. As a separate legal entity, the corporation must pay taxes. When the business passes along profits in the form of dividends, the individual owners are taxed again on these dividends. Managers are subject to more government regulation than are individual proprietors or partnerships. And ownership becomes separated from management; some managers may be tempted to act more in their own interests than those of the stockholders. There are 5 primary methods used by corporations to raise new capital. (1) Sale of common stock: Investors who buy common stock own shares in the corporation but receive no dividends until interest payments are made on outstanding bonds. If the company's financial health is good and its assets sufficient, it can create capital by issuing additional shares of common stock. As the shares are sold, the funds received can be used for expansion. (2) Issuing preferred stock: If profits are limited, the owner of preferred stock will be paid dividends before those with common stock. (3) Issuing bonds: A bond is a promissory note, usually issued for a specified amount. It is sold on the bond market with the promise to pay interest every 6 months or every year. When the bond reaches “maturity,” the company promises to pay back the principal at its face value. Ordinarily, the company agrees to pay interest on its bonds whether or not a profit is made. For this reason a smaller corporation can seldom raise much capital by issuing bonds. (4) Borrowing: Companies can also raise capital by borrowing from lending institutions, primarily banks and savings-and-loan establishments. The borrower must pay the lender interest on the loan, at a rate determined by competitive market forces. (5) Using profits: Some corporations pay out most of their profits in the form of dividends to their stockholders. Investors buy into these companies because they want a high income on a regular basis. Other corporations reinvest most of their profits in expansion. Persons who own such stocks are content to accept a smaller dividend or none at all, if by rapid growth the shares increase in value.