Agribusiness Library LESSON L060073: CORPORATIONS

Objectives 1. Define corporation, examine the distinguishing characteristics of a corporation, and list the four types of corporations. 2. Describe a c corporation, and outline the steps in forming a c corporation. 3. Describe an s corporation, and determine the requirements that must be met to be considered an S corporation. 4. Contrast c and s corporations.

Terms Board of directors C corporation Closed corporation Corporation Dividends Limited liability Limited liability company S corporation Stock

A corporation is a form of business where the business organization is chartered by a state and acts as a separate entity from its owners. 1. It provides limited liability to owners. Limited liability means the investor cannot lose more than the amount invested. 2. A corporation has different tax structures than other business structures.

B. Corporation characteristics 1. Owners own shares (stock), which signifies ownership in a corporation. Ownership in the company is determined by the amount of stock a person owns. For example, if a company has 10,000 shares of stock and a person owns 500 shares, the person owns 5 percent of the company.

a. If a stockholder owns a significant amount of shares, he or she may have a vote on company positions, such as the board of directors who represent the stockholders. b. If a stockholder does not own a significant amount of shares, he or she will not have a vote in company decisions. c. Corporations have a chief executive officer (CEO) or a chief financial officer (CFO) who runs the company on behalf of the stockholders.

2. A corporation raises capital by selling shares of stock. People invest money in the corporation, and as the business gains in success, the stock value will increase. As the stock value increases, the investors see an increase in the value of their stock. 3. The corporation is transferable upon death because stockholders can independently determine the beneficiaries of their shares.

4. Corporations do exist that do not have shareholders because the corporation has members. When this occurs, each member has a vote in the decisions of the corporation. a. This usually occurs when a corporation is not publically traded on the stock market. b. Not-for-profit corporations also operate in this manner. A not-for-profit corporation is a business that does not have making money as a goal.

C. There are four types of corporations. 1. A C corporation is the most common form of a corporation. A C corporation creates a separate legal entity with assets and liabilities separate from the owners. A C corporation has publicly traded stock.

a. Advantages (1) Owners’ personal assets are protected from business debt and liability. (2) Corporations have unlimited life extending beyond the illness or death of the owners. (3) There are tax-free benefits, such as insurance, travel, and retirement plan deductions. (4) Transfer of ownership is facilitated by the sale of stock. (5) A change of ownership need not affect management. (6) It is easier to raise capital through a sale of stocks and bonds.

b. Disadvantages (1) It is more expensive to form than a proprietorship or partnerships. (2) There are more legal formalities. (3) There are more state and federal rules and regulations.

2. An S corporation is selected when shareholders are taxed as a sole proprietor. An S corporation is a corporation that reports all profits through its owners as personal income.

3. A closed corporation resembles the traditional C corporation, but it is designed for a company with a sole owner or a small group of owners, usually not to exceed 30 shareholders. A closed corporation has one or a limited number of shareholders. When a shareholder wishes to leave the business, he or she must offer the shares to existing stockholders before selling to new shareholders.

4. A limited liability company (LLC) is like an S corporation. The LLC offers the advantage of being taxed like a partnership. Multiowner LLCs also offer the protection of limited liability. LLCs do not have stock.

Steps in forming a C corporation A. It is necessary to choose a business name that complies with state laws. B. It is necessary to appoint directors of the corporation. C. It is necessary to file formal paperwork (articles of incorporation) with state and federal governments. D. It is necessary to create bylaws that explain the operating rules.

E. It is necessary to hold a meeting with the board of directors to approve all paperwork. F. It is necessary to issue stock certificates to shareholders. G. It is necessary to obtain licenses and permits required for the business from local, state, and federal governments.

To be treated as an S corporation, the following must be met. A. It must be a domestic corporation or LLC. B. It must have only one form of stock. C. It must have no more than 100 stockholders. D. Stockholders must be U.S. citizens. E. Profits and losses must be allocated to stockholders proportionately according to the amount of stock they own.

Differences between C corporations and S corporations A. C corporations are allowed to keep profits. B. C corporations are taxed on profits at corporate rates. C. C corporations pay dividends, and they are taxed to the shareholders. Dividends are extra money made by the corporation given back to the shareholders.

D. C corporations have additional requirements (i.e., an annual report, board of directors, and federal reporting). E. S corporations pass profits onto shareholders, and they pay taxes on the profits.

REVIEW How does a corporation work? How do you form a C corporation? What are the requirements to be an S corporation? How do C and S corporations differ?