Corporation

What It Means

People often think of corporations as large businesses, such as Barnes & Noble and Wal-Mart, but they can be of any size, from one person to thousands of employees. What makes a corporation different from other companies is that it has a legal identity independent from the people who own or manage it. Thus, Wal-Mart is simply Wal-Mart, regardless of its current owners or directors. Like other types of businesses, corporations might perform any number of activities, including making clothes, building computers, and selling insurance.

Corporations are also defined by how they are owned and managed. A corporation sells stocks (also known as shares), which are certificates that represent ownership in the business. By purchasing stock a person becomes part owner of a corporation. For example, if a corporation had a total of 500,000 shares and a person bought 100,000 shares, that person would own one-fifth of the company. Anyone who owns stock is called a stockholder or shareholder. Shareholders, in turn, elect a board of directors, who oversee the corporation on their behalf. The board then chooses the corporate officers who manage the daily affairs of the corporation. These might include a chief executive officer (CEO), a president, and a treasurer. In the United States corporations must be registered with the state in which they are headquartered.

Corporations enjoy many of the same rights and obligations as individuals. For example, corporations can buy property and sign contracts, and like most individuals, corporations have to pay taxes. Stockholders, moreover, have “limited liability,” meaning they cannot lose more money than they spent to purchase their stock. Even if the corporation goes out of business and cannot pay its bills, a stockholder generally will not lose any personal assets or property, such as a house. Likewise, if a customer were injured at a Kinko’s branch location and decided to sue Kinko’s, that person would not be able to seek damages from any single shareholder in the Kinko’s corporation. Shareholders buy stock with the hope of making money, either from an increase in the value of the stock or from dividends, which are a share of the corporation’s profits.

Other types of corporations include nonprofit corporations, which are often formed for political, religious, or charitable purposes; municipal corporations, which are created by local governments; and government-owned corporations, which sponsor and manage government programs. Organizations such as these, considered nonstock corporations, consist not of shareholders seeking to make profits off of investments but rather of members who vote on policy and procedures.

When Did It Begin

The existence of corporations dates back to ancient India and Rome. Though these early institutions were structured differently from modern corporations, they consisted of individuals who invested money for a specific purpose. In the Middle Ages the Catholic Church was regarded as a corporate structure; everyone understood that the Church was more than the sum of its individual members and that the institution would continue to exist after its current members died. In this sense, the world’s oldest surviving corporation is the Benedictine Order of the Catholic Church, which was founded in 529 ad .

The oldest corporation that most resembles a twenty-first-century business corporation is the Stora Kopparberg mining community in Falun, Sweden. This group received its charter (a document allowing it to do business) from King Magnus Eriksson (1316-74) in 1347. In the early history of the United States, the American government granted only a limited number of corporate charters each year through acts of Congress. To win a charter, a group would have to prove that their corporation would serve the public good, for example, by building roads and canals. Because laws were so strict, many of the largest enterprises in the United States were not corporations. In 1882 John D. Rockefeller (1839-1937) organized Standard Oil as a trust (a collection of companies overseen by a board of directors, or trustees). In 1889 Andrew Carnegie (1835-1919) established his steel empire as a limited partnership (a company in which two or more people, or partners, manage a business together and are personally responsible for the company’s debts). New Jersey and Delaware were among the first states to write laws that were friendly to the development of corporations. Today many corporations are still chartered as “Delaware corporations” because this state has the most corporate-friendly laws.

More Detailed Information

At one time corporations could receive a charter only through an act of legislation, but today corporations typically submit documents called articles of incorporation and pay a yearly filing fee, which ranges from $100 to $800 depending on the state in which the group is seeking to incorporate. The articles of incorporation include information about the nature of the corporation, the amount of stock available to shareholders, and the names and addresses of its directors. After a charter has been granted, a corporation’s board of directors meets to draft the organization’s bylaws, which state the corporation’s internal operating procedures. In the past, corporate charters were issued for a specific, finite period of time, after which corporations were often dissolved and their assets distributed among shareholders. Today corporations can enjoy an unlimited lifespan, provided that they obey all laws and pay their yearly filing fee.

In the United States most corporations are registered with a state government rather than with the federal government. Corporations are subject to laws of the state in which they are registered. Because laws pertaining to corporations vary from state to state, many corporations register in one state but conduct operations from another. For example, many corporations seek registration in Delaware because this state does not charge tax on activities outside the state. Corporations seeking privacy and increased protection of assets often register in Nevada because it does not mandate disclosure of share ownership. In such cases corporations are also subject to the laws of their host state in matters pertaining to employment, civil actions, crimes, and contracts.

A traditional for-profit corporation is called a C Corporation because it is taxed under Subchapter C of the United States tax code. It could be said that a C Corporation is taxed twice. First, the corporation, as a single entity, is taxed for its profits. Next, individual stockholders are taxed on the dividends, or payments, they receive. Another type of corporation is called an S Corporation, which is taxed under Subchapter S of the U.S. tax code. An S Corporation is taxed as if it were a partnership. In a partnership all profit is passed directly to each partner, who in turn pays taxes as an individual. In order to be eligible for S Corporation status, a corporation must be based in the United States and have 100 shareholders or less. All shareholders must be U.S. citizens. In addition, this group must have only one class of stock (with only one kind of voting and dividend arrangement), and profits and losses must be allocated in direct proportion to each stockholder’s financial share of the corporation.

In the case of what are known as public or publicly traded corporations, investors buy and sell corporate stocks through a stock market, such as the New York Stock Exchange or the Nasdaq. The largest U.S. businesses, such as Google and Nike, are publicly traded corporations. The majority of corporations, however, are not. These enterprises are called privately held or close corporations and are managed by small groups of businesspeople. Publicly traded and privately held corporations do business in similar ways, but publicly traded corporations are subject to stricter laws and more intense scrutiny, especially with regard to mergers with other corporations and elections of directors. Many of the largest corporations, such as Coca-Cola, Wal-Mart, Starbucks, and Microsoft, have grown beyond the national level and have established a presence throughout the world. These are called multinational corporations.

Recent Trends

Since the 1990s centers of corporate activity have shifted from the United States and Western Europe to Asia, particularly China. By 2005 Asia, excluding Japan, accounted for 13 percent of the world’s economy, while Western Europe accounted for 30 percent. It was estimated that by 2025 those figures would be nearly equal. That shift was expected to be even more dramatic in the technology industries, affecting where corporations would hire their workers. In the past large American and Western European corporations established factories in developing (poorer and less industrialized) countries, including India and China, so that they could pay low wages to an unskilled labor force. While that practice has continued, corporations have increasingly sought skilled labor, such as computer programmers, from these same developing countries, also at lower wages. In 2005 33 million of the world’s young professionals came from developing countries, which was more than twice the number of those in developed (wealthy and more industrialized) countries.