Corporations

A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is called a corporation. Unlike sole proprietorships and partnerships, a corporation’s legal status and obligations exist independently of its owners. They are not personally liable for the debts of the corporate entity. The ease with which stockholders may transfer all or part of their shares to other investors at any time (i.e. sell their shares in the securities market) adds to the attractiveness of investing in a corporation. Because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.

Corporations have most of the legal rights of a person, including the right to conduct business, to own and sell property, to borrow money and to sue or be sued.

In a corporation, ownership and management are separate. The shareholders or owners of the company’s stock (shares in the company) elect the board of directors, who in turn elect the officers of the corporation. The corporate officers carry out the policies and decisions of the board. In practice, the real power in a corporation usually rests with its chief executive officer (CEO), who is responsible for establishing company policies and supervising the activities of the corporation.

No other form of business ownership can match the success of the corporation in bringing together money, resources, and talent, in accumulating assets, and in creating wealth. While the combined number of proprietorships and partnerships in the United States is four times the number of corporations, the revenue produced by corporations is more than two times greater. Corporations account for 70 percent of the profits earned by U.S. businesses.

A company needn’t be large to incorporate. Most corporations are relatively small. The big ones, however, are really big. The 500 largest corporations in the United States have combined sales of over $5 trillion and employ well over 10 million people.

Corporations have evolved into various types. The first distinction is whether a company is public or private. The exhibit below shows major types of corporations. The most visible corporations are the large, private ones, such as General Motors, IBM, and Coca-Cola, but other types are also common.