Corporations MORE THAN FIVE MILLION corporations exist in the United States with revenues totaling more than 17 billion dollars annually. In 2008, Walmart topped the list with Kroger, ADM, Tyson, Dow, Pfizer, Caterpillar, Johnson & Johnson, Procter & Gamble, and Berkshire Hathaway all in the top 50. Agriculture companies are conservatively estimated to have more than 150,000 corporations, totaling more than 120 million dollars in revenue. Perhaps you will work for a corporation in the agriculture industry. Objective: Analyze types of corporations. Key Terms: board of directors C corporation closed corporation corporation dividends limited liability limited liability company S corporation stock Corporation Types In a corporation, the business organization is chartered by a state and acts as a separate entity from its owners. Corporations provide limited liability to the owners, so they cannot lose more than the amount invested. One main difference of a corporation is that it has different tax structures than other businesses. Page 1 www.mycaert.com
OWNERSHIP Owners have shares or stock in the company. Stock signifies ownership in a corporation. For example, if you owned 500 shares of stock in a company and the company only had 10,000 shares, you would own 5 percent of the company. The more stock you own in the company, the more your opinion matters. If you own a significant amount of shares, FIGURE 1. If you own a significant amount of company shares, you may be on the board of directors. you may be on the board of directors and have a vote on company positions and decisions. However, if you are a stockholder and you do not own a significant amount of shares, you may not have a vote in company decisions. Often, the board of directors will make the larger decisions of the corporations. The board of directors may make decisions on how to invest money made by the corporation, but a chief executive officer (CEO) or a chief financial officer (CFO) will be in charge of daily business decisions and will work on behalf of the stockholders. This structure is easily understood in thinking about our political system. If or when you are able to vote, you are able to elect a U.S. senator. Your senator should represent you in Washington D.C. and make decisions on your behalf. This happens because you are not able to travel to Washington D.C. every time you are needed to vote. Now, the senator can lose his or her job just like the CEO can. If bad decisions are made, the board of directors can fire the person and hire someone new. In a similar fashion, you can choose to elect a new senator when the current senator s term expires if you disagree with the decisions that have been made. QUALITIES OF A CORPORATION A corporation raises capital by selling shares of stock. You will invest your money in the corporation. As the business gains in success, the stock will increase. As the stock increases, you will experience an increase in the value of those shares. If you then choose to sell your stock, you will gain the profits. Unlike a sole proprietorship and partnership, a corporation is transferable upon your death because you can independently determine the beneficiaries of your shares. Some corporations do not have shareholders. Instead, the corporation has members. When this occurs, you will have a vote in the decisions of the corporation. This usually occurs when a corporation is not publically traded on the stock market, such as not-for-profit corporations. The goal of these corporations is not to make money. Page 2 www.mycaert.com
TYPES OF CORPORATIONS Four types of corporations exist. The most common form is a C corporation that creates a separate legal entity with assets and liabilities that are separate from the owners; it has publicly traded stock. The corporations listed earlier are all C corporations. You can look up how much their stock is worth in your daily regional paper or online. Advantages of C Corporations When purchasing stock in a C corporation, you will be protected from business debt and liability. You can only lose the amount of money you invested in the corporation s stock. Also, the corporation will remain a company even if the largest stockholder dies because corporations have unlimited life extending beyond the illness or death of the owners. Corporations also have tax-free benefits, such as insurance, travel, and retirement plan deductions. In addition, stock can be transferred by selling it to others. Therefore, the change of ownership will not affect you or management. This form of business makes it easier to raise capital through the sale of stocks and bonds. For example, you can call a stockbroker or use the Internet to buy stock in a corporation, but you may find it difficult to buy a portion of a local family-owned business in your community. Disadvantages of C Corporations FIGURE 2. Stock values can be checked daily online or in many newspapers. Like any business structure, corporations have disadvantages. If you were to set up a corporation, it would be difficult and more expensive to form than a proprietorship or a partnership. You would experience more legal formality in addition to more state and federal rules and regulations. If you were to choose not to develop a C corporation, you may be interested in an S corporation, which is selected when shareholders are taxed as sole proprietors. An S corporation is a corporation that reports all profits through its owners as personal income. Another type of corporation is a closed corporation, which resembles the traditional C corporation but is designed for a company with a sole owner or a small group of owners, usually not to exceed 30 shareholders. If you, as a shareholder, wished to leave the business, you would have to offer your shares to existing stockholders before selling to new shareholders. A limited liability company (LLC) is another form of a corporation. An LLC is like an S corporation, but LLC Page 3 www.mycaert.com
FURTHER EXPLORATION ONLINE CONNECTION: Corporations Corporations play a major role in our lives. They contribute to our economy and often have a significant amount of power in determining the going rate for an item and the quality standards in terms of green or other corporate initiatives. Although corporations often provide items at a more affordable price because of mass quantities being distributed nationally or internationally, they can also drive up costs as part of their marketing strategies or as part of supply and demand. So it is necessary to see if the advantages outweigh the disadvantages of corporations. To find out more about corporations, visit the following links: http://www.pcdf.org/corprule/failure.htm http://www.ethicalcorp.com/content.asp?contentid=68 http://econ161.berkeley.edu/econ_articles/command_corporations.html offers the advantage of being taxed like a partnership. Multi owner LLCs also offer the protection of limited liability, and LLCs do not have stock. FORMING A C CORPORATION When you form a C corporation, there are steps you will need to follow. First, you will need to choose a business name that complies with state laws. Then you will appoint directors of the corporation. You will not be able to run the business yourself or it would be considered a sole proprietorship. Then you will have to file formal paperwork with state and federal governments called articles of incorporation. You and the directors will create bylaws that explain the operating rules. Next, you will hold a meeting with the board of directors to approve all of the paperwork. Once you have followed those steps, your corporation will be able to sell and issue stock certificates to shareholders. While selling shares, you will be able to obtain required business licenses and permits from local, state, and federal governments. As the business grows, the largest shareholders will form the board of directors. More than likely, if you are starting the corporation, you will be appointed as the first CEO. Many times when a company begins, the largest stockholder or the person who started the business becomes the CEO. FIGURE 3. Paperwork is a necessary part of forming a corporation. Page 4 www.mycaert.com
REQUIREMENTS OF AN S CORPORATION If you choose not to form a C corporation, you may choose the S corporation. When you start an S corporation, a few important requirements will need to be followed. Your corporation must be a domestic corporation or LLC. You will also be able to only sell one form of stock, so you cannot charge different prices or have a variety of ways in which people can own stock in the corporation. You will be limited to no more than 100 stockholders, and they must be U.S. citizens. Finally, profits and losses must be allocated to stockholders proportionately according to the amount of stock they own. Compare and Contrast C and S Corporations There are some notable differences between C corporations and S corporations. TABLE 1. Differences in C& S Corporations C corporations are allowed to keep profits. C corporations are taxed on profits at corporate rates. C corporations pay dividends, and they are taxed to the shareholders. Dividends are extra money made by the corporation that is given back to the shareholders. C corporations have additional requirements (e.g., an annual report, board of directors, and federal reporting). S corporations pass profits onto shareholders, and they pay taxes on the profits. Summary: Corporations have developed into many sizes and make up an important part of the U.S. capitalistic society. Corporations provide you with limited liability that is easily transferred upon death or when you wish to leave the business. Corporations are difficult to set up. Deciding which type of corporation to set up will require you to spend more time in making your decision. Checking Your Knowledge: 1. How many shareholders can be involved in an S corporation? 2. What are two advantages of a C corporation? 3. What are two disadvantages of a C corporation? 4. What are the requirements of an S corporation? 5. What are four types of corporations? Page 5 www.mycaert.com
Expanding Your Knowledge: Go to the Internet to select a sector of agriculture. Find the major corporations involved in that specific segment of the industry. Identify the major corporations and their revenue impact on the U.S. economy. Start with the Web sites below when you begin your search. Possible ideas are the candy industry, grocery industry, food service industry, chemical industry, turf grass industry, or machinery industry. Web Links: Sole Proprietorship vs. C Corporation vs. S Corporation vs. LLC http://www.themoneyalert.com/corp-entity-table.html CNN Fortune 500 Information http://money.cnn.com/magazines/fortune/fortune500/ Corporations in the United States http://economics.about.com/od/smallbigbusiness/a/corporations.htm Agricultural Career Profiles http://www.mycaert.com/career-profiles Page 6 www.mycaert.com