Legal characteristics and stock types of corporations

Corporate Characteristics Proposal

Characteristics of a Corporation

The most unique aspect of a corporation, under U.S. law, is that a corporation is considered an individual, separate legal entity, a fictional 'person,' unlike a single or joint proprietorship or a Limited Liability Company (LLC). The advantage to incorporating a business is that the owners of the corporation are not liable for the corporation's debt. The disadvantage of incorporation is that a corporation pays income taxes, which means that if the founders of the corporation rely upon the corporation as their main source of income, they may be taxed 'twice,' as individuals and as the corporation. Also, the founders lose a certain amount of control over the corporation's activities, unless they own most of the stock, or trade the stock on a private exchange.

The owners of a corporation may be few or many, but all hold stock in the company. The owners are called shareholders or stockholders, and vote for the Board of Directors, which is usually made up of professional managers. The shareholders also receive dividends or profits "when authorized by the Board of Directors" and they "have first right of refusal when additional shares are issued, thereby allowing the stockholder to maintain the same ownership percentage of the company before and after the new shares are issued" ("Accounting Principles II: Characteristics of a Corporation," 2007, Cliffnotes).

As well as limited liability (shareholders are not responsible for debts) a corporation has unlimited life under the law (hence the Ford Company has outlasted the lifespan of Henry Ford). A corporation can issue stock privately, on privately-traded exchanges, as well as on public ones, and can be a for-profit or not-for-profit entity.

Types of stocks

The two main types of stock that a corporation may issue are common stock and preferred stock. Common stockholders own a proportionate amount of ownership in the company, and receive dividends and votes for Board of Director members in proportion to their ownership of stock. Common stock yields higher returns, but owning common stock carries more risk, for the investor as "if a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders" ("Stock Basics: Different Types of Stock," 2007, Investopedia).