Forming and Operating Different Types of Corporations Essay

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Corporations

The modern corporation has a lengthy history that spans four centuries, but this business model has expanded greatly since that time to include a wide range of corporation types with fundamentally different ownership structures and goals (Rao 2). Given the global impact that corporations have on the economy today, it is important to gain a better understanding of corporations, including most especially their similarities and differences and how these affect the manner in which they are operation. To this end, this paper reviews the relevant literature concerning modern corporations to provide their background and an overview, a discussion concerning different types of corporations, and a description concerning how corporations are formed. A discussion concerning corporate financing practices is followed by a description of the respective roles, duties and rights of directors and officers as well as shareholders. Finally, a discussion concerning different types of corporate takeover strategies is followed by a summary of the research and important findings concerning the foregoing issues in the conclusion.

Review and Discussion

Background and Overview

According to the definition provided by Black's Law Dictionary (1991), a corporation is "an artificial person or legal entity created by or under the authority of the laws of a state. The law treats the corporation itself as a person which can sue and be sued" (340). It is important to note, though, that the notion of "an artificial person" must be regarded figuratively. In this regard, Lipartito and Sicilia emphasize that, "It is evident that the corporation cannot be in reality a person or a thing distinct from the corporators who compose it. As a result, when it is said that a corporation is itself a person, or being, or creature, this must be understood in a figurative sense only" (42). It is also important to note, though, that corporations operate in different ways depending in part on their ownership structure and the laws of their respective jurisdictions. " There are a number of different types of corporations that are used for various purposes and these are discussed further below.

Types of Corporations

Today, there are a number of different types of corporations, including public corporations, for-profit organizations, non-profit organizations, domestic corporations, foreign corporations, alien corporations, publicly held corporations, closely held corporations and subchapter S corporations. These different types of corporations are described further in Table 1 below.

Table 1. Description of different types of corporations

Corporation Type

Description

Public corporation

This type of corporation is created by the government to help administer law; this type of corporation often has specific government duties to fulfill. Precedential case law as well as various corporate statutes assign the board of directors of public corporations with the "full power to manage the firm" and "authority is said to be absolutely delegated to the board" (Coates 838).

Private corporations

This type of corporation is created by private persons and does not have government duties to uphold. In each nation-state, private corporations, like private individuals, are bound by domestic laws. Similarly, private corporations and entities are bound by international laws applicable to individuals (Paust 801).

For-profit organizations

The overarching objective of this type of corporation is to make profits which are then divided amongst shareholders.

Non-profit organizations

This type of corporation operates for educational, charitable, social, religious, civic, or humanitarian purposes; although they may earn profits these are not distribute among shareholders but are rather reinvested into the corporation. In sum, a nonprofit organization differs from a for-profit corporation principally because they are barred from distributing their net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees (Hopkins 322).

Domestic corporations

This type of corporation refers to the state in which it is incorporated.

Foreign corporations

This type of corporation operates in a state in which it is not incorporated.

Alien corporations

This type of corporation has been incorporated in a foreign country.

Publicly held corporations

This type of corporation offers stock for sale to the public.

Closely held corporations

This type of corporation does not sell its stock to the public.

Sub-chapter S corporations

These must be a domestic corporation with no more than 100 shareholders; in addition, only individuals and trusts can be shareholders and no shareholder can be a nonresident alien. Some of the more important benefits of this type of corporation include: (a) government taxes these corporations differently from other corporations; (b) shareholders are allowed to deduct corporate losses as personal income and (c) they provide limited liability for directors, officers and shareholders.

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Subchapter S corporations can only have one class of stock outstanding at any given time and they generally cease operation as a subchapter S if they are acquired by a public corporation or if it completes an initial public offering of its stock (Steinberg 68).

Source: Adapted from Albino, Wilson, Bell and Lao 15-21 unless otherwise specified

In addition, there are two other types of corporations, the definition of which relates to whether they have formally completed all of the statutory requirements and filed the appropriate documents, including articles of incorporation, with the secretary of state in the state of incorporation and received a certificate in proof thereof which are referred to as "de jure corporations" compared to "de facto corporations" which operate as corporations but which have not satisfied the foregoing requirements. For example, according to the definition provided by Black's Law Dictionary (1991), a de jure corporation is "one that is created as a result of compliance with all of the constitutional or statutory requirements of the state of incorporation" (425). By contrast, a de facto corporation is one that "has not substantially met the requirements of the state incorporation statutes" (Albino et al. 38).

Irrespective of the type of corporation involved, they all share a common goal. In this regard, Kelly advises that, "Corporations are believed to exist for one purpose alone: to maximize returns to shareholders" (33). As noted in Table 1 above, these returns may assume the form of profits in the case of for-profit corporations or benefits to the stakeholders, including the general public in the case of public corporations. As can also be seen from the definitions in Table 1 above, a corporation can be a number of different types of corporations simultaneously such as in the case of a domestic, for-profit subchapter S corporation. Corporations also differ in terms of how they are formed depending on the specific jurisdiction, but the general process is described below.

Forming a Corporation

Again, although specific requirements vary by jurisdiction, the following general steps are required to form a corporation:

Select an available name for the corporation (the name must include one of the words, corporation, company, limited, or incorporated) (Albino et al. 27) which conforms with the state of incorporation's corporation rules;

Appoint the initial directors of the corporation;

File formal paperwork, usually called "articles of incorporation" with the secretary of state together with the requisite filing fee;

Write corporate bylaws that set forth the corporation's operating rules;

Conduct the first meeting of the board of directors;

Issue stock certificates to the corporations' initial owners who are therefore known as the shareholders; and,

Secure requisite licenses and permits (Laurence 2-3).

Although forming a corporation is a fairly straightforward process, obtaining financing for corporate operations can be far more complex -- and challenging -- as discussed below.

Corporate Financing

The most common corporate financing approach is to issue and sell corporate debt or equity securities; debt securities are essentially loans to the corporation while equity security represent a percentage ownership in the corporation (Albino et al. 31). There is a growing body of evidence that indicates many corporations coordinate the time of their issuance of these different types of securities in order to maximize the market benefits (Swanson and Srinidhi 172).

Roles, Duties and Rights of Directors and Officers

The roles and duties of directors and officers are controlled by statutory law (Albino et al. 32). In general, directors and officers perform essentially the same role and share the same goals to maximize return to on shareholder investment (Albino et al. 32). Despite these similarities, it is important to note that since corporate officers are also corporate employees, their respective rights are set forth in their employment contracts (Albino et al. 32). By contrast, directors have a number of rights, including (a) the right to compensation which means being paid in some fashion in return for their work; (b) right to participation in understanding the operation and operating the corporation; (c) right to inspection to all corporate books and records and to receive notification of all meetings; (d) right to indemnification that allows them to be reimbursed for legal expenses defending against lawsuits (Albino et al. 44).

Roles, Duties and Rights of Shareholders

Like directors, shareholders also enjoy a number of rights, including (a) the right to receive physical stock certificates that are evidence of their ownership in the corporation; (b) preemptive rights.....

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