Unit 4 Microeconomics: Business and Labor Chapters 8.3

1. Unit 4 Microeconomics: Business and Labor Chapters 8.3 Economics Mr. Biggs

2. Corporations, Mergers, and Multinationals Corporations A corporation has a “legal identity” separate from those of its owners and is regarded much like an individual. It pays taxes, can sue, make contracts, etc. Corporation - A legal entity owned by individual stockholders.  Stock - A certificate of ownership in a corporation.

3. Types of Corporations • Closely held corporations - Corporation that issues stock to only a few people, often family members. • Publicly held corporations - Corporation that sells stock on the open market. • Corporate Structure • Corporations have a top down structure: • Stockholders • Board of directors • Corporate managers • Employees

4. Advantages of Incorporation • Incorporation offers advantages to both the individual owners, or stockholders, and to the corporation itself. • These include: • Limited liability for owners • Transferable ownership • Ability to attract capital • Long life

5. Advantages for the Stockholder Corporations provide a limited liability for owners, or stockholders. Stockholders can only lose the amount of money they invested and can transfer ownership by selling their shares. Advantages for the Corporation Corporations raise capital by selling stocks. Corporations can borrow money by selling bonds. Bond - A formal contract to repay borrowed money with interest at fixed intervals. Corporations hire experts to create and market the best services and goods. Corporations continue after the original owner dies.

6. Disadvantages of Incorporation • Corporations’ disadvantages include: • Expense and difficulty of start-up • Double taxation • Potential loss of control by the founders • More legal requirements and regulations • Difficulty and Expense of Start-Up • Certificate of incorporation or corporate charter - License to form a corporation issued by the state government. • Corporate charters are complex and confusing and require legal help to set up.

7. Double Taxation Corporations are separate legal entities and must pay taxes on income. Individual stockholders must also pay taxes on dividends. Dividends - The portion of corporate profits paid out to stockholders. Loss of Control Managers make day to day decisions. A manager’s decisions may not always be in the best interest of the stockholders. For example, they may be only interested in preserving their jobs or securing a larger bonus.

8. More Regulation • Publicly held corporations are required to file reports to the Securities and Exchange Commission (SEC). • A corporation’s board of directors are accountable to the shareholders at annual meetings.  • Corporate Combinations • As a corporation continues to grow, managers and owners may decide to merge, or combine, the firm with another company. • There are three kinds of mergers: • Horizontal mergers • Vertical mergers • Conglomerates

9. Horizontal Mergers Horizontal merger - The combination of two or more firms competing in the same market with the same good or service. The purpose of a horizontal merger is to achieve economies of scale. The government monitors mergers to prevent the formation of monopolies. For example, Daimler-Chrysler. Vertical Mergers Vertical merger - The combination of two or more firms involved in different stages of producing the same good or service. For example, Time Warner and Turner or Ford Motor and Tesla Motor.

10. Conglomerates Conglomerate - A business combination merging more than three business that make unrelated products. Multinational Corporations Multinational corporation (MNC) - A large corporation that produces and sells its goods and services throughout the world. Advantages of Multinationals Multinationals provide jobs and products around the world. Disadvantages of Multinationals Critics feel that multinationals negatively influence the culture and politics of the host country. They also criticize the low wages and poor working conditions.

11. The End