Understanding Corporations: Formation, Stock Types, Bonds, and Advantages/Disadvantages

1. SECTION 3 Corporations Essential Question: • Describe what a corporation is, explain why forming a corporation is considered difficult; compare and contrast common stock from preferred stock and explain the differences between stocks and bonds, and list advantages and disadvantages of corporations.

2. SECTION 3 Corporations What is a Corporation (Characteristics) • A corporation is a business organization • It is a legal entity which means it can own property, hire/fire workers, and be sued • Its ownership is divided into certificates known as stock. • This is the largest B.O. in terms of employees, revenue, and money making ability.

3. SECTION 3 Corporations To form a corporation: • Submit an application for the articles of incorporation and obtain a corporate charter. • This takes time to get government approval • The application fee is often substantial • Many applications are rejected and require re-submission (and a new fee)

4. SECTION 3 Corporations Information required by the articles of incorporation: • the name and purpose of the proposed corporation • the address of the corporate headquarters • the method of fundraising to be used by the corporation (Stock, Private Investors, Bond- etc.) • the amount of money the corporation expects to raise • the names and addresses of the major corporate officers

5. SECTION 3 Corporations Corporate structure: • Ownership by shareholders (stock owners) • headed by a board of directors to make decisions- BOD chosen by shareholder vote. • run by corporate officers—CEO, president, vice presidents, etc.—who carry out decisions made by the board • made up of department heads and other employees to perform day-to-day tasks

6. SECTION 3 Corporations What is stock • Corporation gives itself a value based on business projections and divides this value into certificates of ownership known as stock. It sells these certificates to raise money to fund operations. • Each certificate is called a share and starts with a specified value. If stock is the whole pizza, shares are the slices! • Once you own a share, you can sell it for profit if you choose

7. SECTION 3 Corporations Two types of Stock: • Common Stock: • Allows shareholder to voice opinion in company affairs • Eligible to receive dividends • Preferred Stock: • Doesn’t allow shareholders to participate in operations of company • Gets paid dividend before common stock

8. SECTION 3 Corporations Advantages/Disadvantages of owning stock • A.) Stock is the easiest way to OWN part of a company • Requires only enough money to purchase a share • Owners are not responsible for operations, decisions, and are NOT liable • A.) Owners can resell shares for profit • D.) Unless you own a significant number of shares, you have little impact on the profits/loss of the company

9. SECTION 3 Corporations Corporate Bonds: • A certificate issued by the corporation in exchange for money from investor • Different because the bondholder does not own part of company • When term of debt is up, bondholder is repaid the loan (principal) plus interest

10. SECTION 3 Corporations Advantages of organizing a corporation: • limited liability- if company fails, personal property is not involved • separation of ownership from management- allows for clinical thought- not emotional • ease of raising capital- The better the company does, the more investors are willing to invest. • longevity

11. SECTION 3 Corporations Disadvantages of organizing a corporation: • costly and difficult to obtain a corporate charter • number of government regulations to follow • slow decision-making process- many people have to review and be given opportunity to give input • The larger the corporation, the more opportunity for tension in terms of company goals, operations, and direction