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READING

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I

Corporation. A corporation is a business organization created under a government charter. Ownership of corporation is represented by shares of stock, and for that reason corporate owners are known as stockholders.

One feature of corporation is that the courts treat it as a legal “person”. It can, for example, sue and be sued and enter into contracts, and it must pay taxes.

Although corporations are outnumbered by about four to one by sole proprietorships, they dominate American business. Corporations are so important because of the advantages they offer over sole proprietorships and partnerships:

Limited liability. Unlike the owners of proprietorships and partnerships, who can be held personally liable for the debts of their firms, the most that corporate shareholders can loose (i.e., their liability) is limited to whatever they paid for their shares of stock. Limited liability is thought to be so important that corporations in most English-speaking countries outside of the United States add the abbreviation “Ltd” (for Limited) to their company name.

Ease of transfer. Stockholders can enter or leave a corporation at will simply by buying or selling shares of stock in that corporation.

Unlimited life. When the corporate stockholders die, their shares of stock are passed on to their heirs. Meanwhile, the corporation is free to conduct business as usual.

Tax advantages. In certain instances individuals can reduce their tax liability by incorporating.

With all these advantages you might wonder why there are so many more unincorporated businesses than incorporated ones. The answer has to do with the disadvantages of the corporation:

It is difficult and expensive to organize a corporation. The process of obtaining a charter usually requires the services of a lawyer. Most small firms prefer to avoid these expenses by forming proprietorships or partnerships.

Corporations are subject to special taxes. The federal government, along with many state and local governments, taxes corporate income in addition to the taxes paid by shareholders on their dividends. (Dividends are the proportion of a corporation’s profits that are distributed to the stockholders.)

Corporations whose stock shares are sold to the public give up their right to privacy. The law requires that these large, open (or public) corporations disclose information about their finances and operations to anyone interested reading about them. The purpose of this legislation is to give people information about companies in which they might invest. But information that helps investors may also be of value to the competition. For that reason, some corporations have chosen to remain closed (or private) corporations rather than disclose information they would prefer to keep secret.

 

II




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