UnitVIII (1)

BUS 3301, Business Law 1 Course Learning Outcomes for Unit VIII Upon completion of this unit, students should be able to: 9. Analyze the operational aspects of corporations. 9.1 Discuss the characteristics of corporations. 9.2 Describe the requirements for formation of a corporation. 9.3 Compare the techniques for financing corporations. Required Unit Resources Chapter 22: Corporations: Formation and Organization Unit Lesson Corporations As we have seen, there are several forms for conducting a business, and each has its different characteristics and positive and negative consequences, but one form of doing business, the corporation , is significantly different from other forms of doing business. The primary reason that corporations are different from other forms of doing business and the characteristic that gives corporations their unique combination of characteristics is that corporations are considered to be separate legal entities. In other words, a properly formed corporation is a legal entity that is legally different from the people who own the corporation. There is no difference between a business operated as a sole proprietorship and the sole proprietor who operates that business. Partnerships can own business assets, but there is no legal difference between the people who are partners and the partnership itself. Limited liability companies begin to highlight the separation between the business operated by the limited liability company and the people who own the limited liability company, but the distinction between the organization that operates the business and the people who own the business is not clear-cut. A corporation and its owners, though, clearly fall into separate legal categories. Limited Liability Since a corporation is a legal entity, it is responsible for its legal obligations, and the people who own the corporation, known as shareholders or stockholders , are not personally responsible for the legal obligations of the corporations and have at risk of loss only the amount that they paid for their ownership in the corporation. Shareholders in a corporation have limited liability. If a business will engage in activities that could create significant legal obligations, the owners of that business should seriously consider creating a corporation to operate that business. For example, if a business is being created to own and operate long-haul trucks that will carry hazardous cargo, that business should be operated by a corporation since the opportunities for accidents that could be very serious are significant, and the owners of the business will not want to be personally responsible for the consequences of those accidents. Of course, the business will need insurance coverage to address potential liability, but since insurance does not often cover all of the legal consequences of accidents, the corporate form of doing business would protect the shareholders of the corporation from personal liability. Income Taxes The status of a corporation as a legal entity separate from its shareholders also means that a corporation is responsible for its own income taxes. In a sole proprietorship, the income and expenses of the business are income and expenses of the sole proprietor, so the sole proprietor is responsible for whatever income taxes the sole proprietorship business owes. Partnership and limited liability companies are pass-through UNIT VIII STUDY GUIDE Corporations

BUS 3301, Business Law 2 UNIT x STUDY GUIDE Title organizations for income tax purposes which means that whatever taxable income a partnership or limited liability company earns is taxable to the owners of the business organization, and the business organization itself has no liability for the taxes owned on that taxable income. Corporations, however, are not pass-through organizations, and the taxable income earned by the corporation is taxed to the corporation. Of course, though corporations are considered to be legal entities, they cannot physically do anything and must act through employees who function as their agents. Employees of a corporation include those who keep up with the financial transactions of the corporation and compute the taxable income of the corporation, but those employees are not personally liable for the taxes that the corporation owes. Double Taxation The fact that corporations are responsible for the income taxes that they owe results in one of the primary disadvantages of using the corporate form of doing business—double taxation. When the income tax liability of a corporation is calculated, the allowable expenses incurred by the corporation are deducted from the income received by the corporation, and the result is the taxable income of the corporation, and the corporation pays income taxes on that taxable income. One of the reasons that people own interests in corporations is that when corporations are profitable, they often pay some of those profits to their shareholders in the form of dividends. Dividends paid by a corporation are not considered to be expenses that can be deducted from the corporation’s income in determining the corporation’s taxable income, so when a corporation pays dividends to shareholders, those dividends are paid from funds that have already been taxed. When dividends are received by a shareholder, those dividends are considered to be taxable income to the shareholder, so the shareholder must pay income taxes on those dividends. Therefore, money paid by a corporation to a shareholder as a dividend has been taxed once at the corporate level and again at the shareholder level, resulting in the double taxation of corporate dividends. Strategies have been developed to avoid or reduce the burden of double taxation of corporate dividends. For example, certain corporations can qualify under federal tax law as S Corporations so that the corporation is not taxed and its taxable income is passed through to the shareholders as it would in a partnership, but the restrictions that apply to Subchapter S Corporations can make them an unattractive form of doing business. Sale of Shares in a Corporation Ownership in a corporation is evidenced by stock certificates which are documents that indicate the name of the shareholder and the number of shares or percentage ownership of the corporation that is represented by the stock certificate . Unless the corporation or some provision of law imposes restrictions on the sale of the shares of stock that a shareholder owns, a shareholder is free to sell their shares in the corporation whenever they chose and for whatever price they want. If the corporation is large enough, the stock of the corporation may be bought and sold on an organized stock exchange such as the New York Stock Exchange (NYSE) where the price of the stock is established periodically through multiple sales and purchases of the stock. If the stock of a corporation is not bought and sold on an organized stock exchange, purchase or sale of the stock can still be arranged by negotiated sale. Whether the stock of a corporation is bought and sold on a stock exchange or through a negotiated sale, one of the advantages of the corporate form of doing business is that owners of the corporation can sell their interests in the corporation when they decide that either they no longer want to own an interest in the corporation or they decide to move their investment to another business. Though the owners of the corporation may change, the change in ownership does not impact the corporation, and the corporation continues to exist. Formation of Corporations Corporations are creatures of state law. That is, a corporation is properly formed by satisfying the requirements of the law of the state where the corporation is to be formed. While the requirements for forming a corporation vary from state to state, the requirements are similar in most states. Formation of a corporation begins with the selection of a name and the reservation or approval of that name by the state office where corporations are registered. That is a mechanical process, but the name selected must not be the same as or similar to the name of a corporation already formed in the state, and the name of the corporation must contain the word corporation , corp , incorporated , inc. , company , or co .

BUS 3301, Business Law 4 UNIT x STUDY GUIDE Title Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. View the Unit VIII Glossary to review key terms presented in this unit. Alternate format for Unit VIII Glossary Reference Photogl. (n.d.). Books on library shelves (ID 20785201) [Photograph]. Dreamstime. https://www.dreamstime.com/stock-image-books-library-shelves-image20785201 (Photogl, n.d.)