Forms of Business Enterprise
The corporation has become a vital force in the nation’s economy. As rules and regulations developed to define what corporations could and could not do,
corporations acquired the legal attributes of people. Like you, a corporation can
receive, own, and transfer property; make contracts; sue; and be sued.
The relationship between a corporation and its shareholders is a source of enormous strength. Since ownership and management are separate, the owners may
get rid of the managers, if the owners vote to do so. Conversely, because shares of the
company may be bequeathed of sold to someone else, the company’s ownership may
change drastically over time while the company and its management remain intact.
The corporation’s unlimited life span gives it the potential for significant growth.
Types of corporations
The most visible corporations are the large, private ones like General Motors, IBM, and Coca-cola, but other types are also common.
Serial Number Type Definition Example
1 Public corporation Business formed by federal or state governments for a specific public purpose TVA
2 Quasi-public corporation Public utilities with a government-granted monopoly on providing basic public services Commonwealth Edison
3 Private corporation Business owned by private individuals or companies General Motors
4 Not-for-profit corporation Service or arts institution in which no stock-holder of trustee shares in the profits or losses and which is exempt from corporate income
taxes Harvard University
5 For-profit corporation Companies in business to make a profit IBM
6 Professional corporation Business whose partners offer professional services (medical, legal, engineering) and can set up beneficial pension and insurance
packages La Jolla Medical Group, Inc.
7 Limited liability company A joint-stock company, the financial liability of whose members is limited by law. Realatech
8 Parent company Operating company that owns or controls subsidiaries through the ownership of voting stock Sears, Roebuck
9 Holding company Corporation organized for the purpose of owning stock in and managing one of more corporations; differs from a parent company in that it
generally does not conduct operations of its own Intermark
10 Subsidiary corporation Corporation that is entirely, of almost entirely, owned by another corporation known as a parent company of holding company Seven-up
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. One advantage is the corporation’s limited liability. Although a corporate
entity can assume tremendous liabilities, it is the corporation that is liable rather than
any of the private shareholders. Say you buy stock in a company that goes bankrupt.
You may lose the money you invested in the stock, but you are not legally responsible
for paying the company’s debts. Of course, the board members and company
management may be liable if they have acted irresponsibly of illegally.
Corporations that are publicly traded (also called open corporations) actively sell stock on the open market. Both private an quasi-public corporations may be publicly
traded. Publicly traded corporations have the advantage of liquidity, which means that
investors can easily convert their stock into cash by selling it on the open market. This
makes buying stock in a public corporation attractive to many investors.
Corporations that are not publicly traded (also called closed corporations) withhold their stock from public sale, preferring to finance any expansion out of their
own earnings or to borrow from some other source. This gives the owners complete
control over their operations and protects the business form unwelcome takeover
A corporation’s unlimited life span is another important advantage. It allows a firm to make long-range plans and to recruit, train, and motivate the best employees.
Publicly owned companies are required by the government to follow certain rules and to publish information about their finances and operations. These reporting
requirements increase the pressure on corporate managers to achieve short-term
growth and earnings targets in order to satisfy shareholders and attract potential
investors. In addition, having to disclose financial information increases the
company’s vulnerability to competitors and to those who might want to take over the
company. The paperwork and costs associated with incorporation can also be burdensome, particularly if you plan to sell stock to the public.
Although the tax rates for small corporations have declined in recent years,
incorporated businesses still suffer from relatively high taxes when compared with unincorporated businesses. All corporations pay a tax of 34 percent on annual profits between $75,000 and $100,000. In addition, shareholders must pay income taxes on their share of the company’s profits received as dividends. This means that corporate profits are taxed twice, whereas profits in a sole proprietorship or partnership are taxed only once, and at a lower rate.