TYPES OF BUSINESSES
[ 5.3 ] Corporations
[ 5.3 ] Corporations
Learning Objectives
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Explain the characteristics of corporations, including the creation of stocks
and bonds.
Analyze the advantages of incorporation.
Analyze the disadvantages of incorporation.
Compare and contrast corporate combinations.
Describe the role of multinational corporations.
Key Terms
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corporation
stock,
closely held corporations.
publicly held corporation,
bond
certificate of incorporation,
dividends.
limited liability corporations
horizontal merger,
vertical merger,
conglomerate.
multinational corporations
Unlike a sole proprietorship, a corporation
is a business owned by stockholders.
E. Napp
Corporation
• A corporation is a legal entity owned by
individual stockholders.
• A corporation is considered a separate
entity apart from its owners.
• As such, the corporation can be sued
but individual stockholders cannot be
sued.
The Characteristics of Corporations
A large corporation has the capital to build factories and hire many workers. As a result, it can
produce and sell goods on a large scale.
Each stockholder is a partial owner
of the corporation.
E. Napp
Stocks
• When a business is incorporated,
stocks are generally sold.
• By selling stocks, the corporation
acquires capital.
• By buying stocks, individuals become
partial owners of the corporation.
By becoming
a stockholder
or partial owner
of Burger King,
the investor
receives some
of the
corporation’s
profits.
Limited Liability
• However, it is important to remember
that a corporation is a separate entity
apart from its owners.
• Therefore, the stockholder has limited
liability.
• He can only lose his investment.
The Characteristics of Corporations
Categorize In a corporation, who chooses the board of directors, and who chooses the chief
executive officer?
Advantages of Incorporation
Incorporation, or forming a corporation, offers advantages to both
stockholders and the corporation itself.
These advantage include:
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limited liability for owners
transferable ownership
ability to attract capital
long life.
Disadvantages of Incorporation
Corporations do have some disadvantages, including expense and difficulty of
start-up, double taxation, potential loss of control by the founders, and more legal
requirements and regulations.
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Difficulty and Expense of Start-Up
Double Taxation
Loss of Control
More Regulation
Double Taxation
• Double taxation is one of the
disadvantages of incorporation.
• Double taxation means that after
corporations pay taxes on their profits,
individual stockholders pay taxes on
their dividends.
• Profits are taxed twice!
Corporate Mergers
Corporations can grow very large. One way to
grow is to raise money by selling stocks or
bonds.
Corporations may also grow by merging, or
combining, with another corporation.
A merger occurs when one business
acquires another business. The
government carefully monitors mergers.
Corporate Mergers
Draw Conclusions How do you think that Office Depot’s three horizontal mergers over 23 years
may have benefited the company?
Multinational Corporations
The world’s largest corporations produce and sell their goods and
services in more than one country.
They are called multinational corporations (MNCs). MNCs usually
have headquarters in one country and branches in other countries.
Multinationals must obey laws and pay taxes in each country in
which they operate.
Multinational Corporations
Disney is a multinational corporation with stores and theme parks all over the world. This photo
shows the entrance to Disneyland in Paris, France.
Quiz: The Characteristics of Corporations
A publicly held corporation has
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B.
C.
D.
no legal identity beyond that of its owners.
many shareholders who can buy or sell its stock.
a few stockholders who are often family members.
stockholders who rarely trade their shares of stock.
Quiz: Advantages of Incorporation
How do corporations raise capital?
A.
B.
C.
D.
by transferring funds from the owners to the investors
through grants from the board of directors
by taking out loans against the owners’ assets
by selling stocks and bonds
Quiz: Disadvantages of Incorporation
In order to do business, what is one regulation that corporations have to follow?
A.
B.
C.
D.
They have to form limited liability corporations.
They have to have an advisory board that makes financial decisions.
They have to sell stocks and bonds on the stock exchange.
They have to file quarterly and annual reports with the SEC.
Quiz: Corporate Mergers
What is one advantage of a vertical merger?
A.
B.
C.
D.
It can allow a firm to operate more efficiently.
It can allow a firm to have a monopoly.
It can allow a firm to avoid government regulations.
It can allow a firm to purchase unrelated businesses.
Quiz: Multinational Corporations
Which of the following is a potential disadvantage of multinational corporations?
A.
B.
C.
D.
They sell stocks and bonds in other countries.
They have an undesired influence on politics and culture in other countries.
They provide jobs in other countries.
They spread new technologies to other countries.