Types of Corporations: Formation, Financing, and Takeovers

Introduction

The modern corporation has a lengthy history spanning four centuries, but this business model has expanded greatly to include a wide range of corporation types with fundamentally different ownership structures and goals (Rao 2). Given the global impact that corporations have on the economy today, it is important to gain a better understanding of corporations — most especially their similarities and differences and how these affect the manner in which they operate. To this end, this paper reviews the relevant literature concerning modern corporations to provide their background and an overview, a discussion of different types of corporations, and a description of how corporations are formed. A discussion of corporate financing practices is followed by a description of the respective roles, duties, and rights of directors, officers, and shareholders. Finally, a discussion of different types of corporate takeover strategies is followed by a summary of the research and its important findings in the conclusion.

Types of Corporations

According to the definition provided by Black's Law Dictionary (1991), a corporation is "an artificial person or legal entity created by or under the authority of the laws of a state. The law treats the corporation itself as a person which can sue and be sued" (340). It is important to note, however, that the notion of "an artificial person" must be understood figuratively. As Lipartito and Sicilia emphasize, "It is evident that the corporation cannot be in reality a person or a thing distinct from the corporators who compose it. As a result, when it is said that a corporation is itself a person, or being, or creature, this must be understood in a figurative sense only" (42). It is also important to note that corporations operate in different ways depending in part on their ownership structure and the laws of their respective jurisdictions.

Today, there are a number of different types of corporations, including public corporations, for-profit organizations, non-profit organizations, domestic corporations, foreign corporations, alien corporations, publicly held corporations, closely held corporations, and subchapter S corporations. These different types of corporations are described in Table 1 below.

Table 1. Description of different types of corporations

Public corporation: This type of corporation is created by the government to help administer law; it often has specific government duties to fulfill. Precedential case law as well as various corporate statutes assign the board of directors of public corporations with the "full power to manage the firm" and "authority is said to be absolutely delegated to the board" (Coates 838).

Private corporations: This type of corporation is created by private persons and does not have government duties to uphold. In each nation-state, private corporations, like private individuals, are bound by domestic laws. Similarly, private corporations and entities are bound by international laws applicable to individuals (Paust 801).

For-profit organizations: The overarching objective of this type of corporation is to make profits, which are then divided among shareholders.

Non-profit organizations: This type of corporation operates for educational, charitable, social, religious, civic, or humanitarian purposes. Although it may earn profits, these are not distributed among shareholders but are instead reinvested into the corporation. In sum, a nonprofit organization differs from a for-profit corporation principally because it is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees (Hopkins 322).

Domestic corporations: This type of corporation refers to the state in which it is incorporated.

Foreign corporations: This type of corporation operates in a state in which it is not incorporated.

Alien corporations: This type of corporation has been incorporated in a foreign country.

Publicly held corporations: This type of corporation offers stock for sale to the public.

Closely held corporations: This type of corporation does not sell its stock to the public.

Subchapter S corporations: These must be domestic corporations with no more than 100 shareholders; in addition, only individuals and trusts can be shareholders, and no shareholder can be a nonresident alien. Some of the more important benefits of this type of corporation include: (a) the government taxes these corporations differently from other corporations; (b) shareholders are allowed to deduct corporate losses as personal income; and (c) they provide limited liability for directors, officers, and shareholders. Subchapter S corporations can only have one class of stock outstanding at any given time, and they generally cease operation as a subchapter S if they are acquired by a public corporation or if they complete an initial public offering of their stock (Steinberg 68).

Source: Adapted from Albino, Wilson, Bell, and Lao 15–21 unless otherwise specified.

In addition, there are two other types of corporations whose definitions relate to whether they have formally completed all statutory requirements and filed the appropriate documents — including articles of incorporation — with the secretary of state in the state of incorporation and received a certificate in proof thereof. These are referred to as de jure corporations, compared to de facto corporations, which operate as corporations but have not satisfied the foregoing requirements. According to the definition provided by Black's Law Dictionary (1991), a de jure corporation is "one that is created as a result of compliance with all of the constitutional or statutory requirements of the state of incorporation" (425). By contrast, a de facto corporation is one that "has not substantially met the requirements of the state incorporation statutes" (Albino et al. 38).

Irrespective of the type of corporation involved, they all share a common goal. Kelly advises that "corporations are believed to exist for one purpose alone: to maximize returns to shareholders" (33). As noted in Table 1 above, these returns may take the form of profits in the case of for-profit corporations, or benefits to stakeholders including the general public in the case of public corporations. As can also be seen from the definitions in Table 1, a corporation can simultaneously satisfy the definitional requirements for more than one corporation type — for example, a domestic, for-profit subchapter S corporation. Corporations also differ in terms of how they are formed depending on the specific jurisdiction, but the general process is described below.

Forming a Corporation

Although specific requirements vary by jurisdiction, the following general steps are required to form a corporation:

1. Select an available name for the corporation. The name must include one of the words corporation, company, limited, or incorporated (Albino et al. 27), and must conform to the state of incorporation's corporation rules.

2. Appoint the initial directors of the corporation.

3. File formal paperwork — usually called "articles of incorporation" — with the secretary of state, together with the requisite filing fee.

4. Write corporate bylaws that set forth the corporation's operating rules.

5. Conduct the first meeting of the board of directors.

6. Issue stock certificates to the corporation's initial owners, who are therefore known as shareholders.

7. Secure all requisite licenses and permits (Laurence 2–3).

Although forming a corporation is a fairly straightforward process, obtaining financing for corporate operations can be far more complex and challenging, as discussed below.

Conclusion

The research showed that corporations are artificial persons or legal entities formed pursuant to the laws of a state. Although the concept of an artificial person must be understood figuratively, the research also confirmed that a corporation is treated as a person under the law and can sue and be sued. A number of different corporation types exist, including public corporations, private corporations, for-profit organizations, non-profit organizations, domestic corporations, foreign corporations, alien corporations, publicly held corporations, closely held corporations, and subchapter S corporations. It is possible for a single corporation to satisfy the definitional requirements for more than one of these types simultaneously. The process by which corporations are formed was shown to be relatively straightforward; however, entities that fail to complete the formal tasks required are known as de facto corporations. The research also showed that directors, officers, and shareholders enjoy certain legally defined rights, and that corporate financing is generally accomplished through the issuance and sale of debt or equity securities. Finally, the research showed that there are a number of different takeover strategies used to acquire corporations, including hostile takeovers, tender offers, exchange tender offers, and cash tender offers.

Works Cited

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