Corporations

Proprietorships are the most numerous form of business organization, but in terms of market value, corporations are the dominant form. A corporation is a legal person in the eyes of the law, separate in concept from its owners and managers. As a person, it has rights, duties, privileges, and obligations. The corporate organizational form has several advantages. As a separate legal entity, its life does not depend on that of its owners. Unlike a proprietorship or partnership, the death of a shareholder does not force the corporation to stop doing business. Shares of ownership in the corporation, especially those listed on stock exchanges such as the New York Stock Exchange, can be traded at easily discernible prices. Issuing shares gives a corporation access to much larger pools of capital than a partnership or proprietorship. As a legal entity, it can borrow money in its own name. Also, as owners of a corporation have limited liability, the most they can lose is their investment. A major disadvantage of the corporate organizational form is the taxation of earnings. Depending upon the income level, corporate income may be taxed at higher rates than proprietor or partnership income. In addition, corporate dividends are taxed twice. As corporations pay dividends from after-tax earnings, they represent funds that have been taxed once at the corporate level. Investors then pay taxes on these dividends again, as part of their personal income. Two special forms of corporate organization in the US allow dividends to escape double taxation. Many countries’ laws recognize the corporate form of organization. US corporations may use the suffixes ‘‘Inc.’’ or ‘‘Corp.’’ to designate themselves. British corporations use the suffix ‘‘PLC,’’ for public limited company, in which limited refers to shareholders’ liability in the firm. The suffix ‘‘AG’’ following the same names of firms in Germany, Austria, Switzerland, or Liechtenstein is an abbreviation for Aktiengesellschaft, which means corporation. Some countries allow corporations to sell bearer shares, which allow the owners to remain anonymous. A history of social upheavals, wars, and high taxation in Europe led to the evolution of bearer shares to allow owners to remain anonymous and thus escape taxation from their governments or identification if their governments were overthrown. Suffixes of ‘‘NV’’ (Naamioze Venootschap) in the Netherlands and ‘‘SA’’ (Societe Anonyme) in France and Belgium designate such firms. In sum, a corporation is one type of business organization that is created as a distinct ‘‘legal person’’ composed of one or more actual individuals or legal entities, primary advantages of a corporation include limited liability, ease of ownership, transfer, and perpetual succession.