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Unlike a partnership or proprietorship, a corporation is an entity distinct from those who created it, run it and own it. Corporations are created by law. A corporation is formed by a licence granted by the state. This is known as a charter or as articles of incorporation.
Some corporations remain private while others become public. Ownership of a corporation is done so through the issuance of shares. When a corporation goes public, its shares are offered for purchase to the general public. After that, the shares are transferable and are traded on an organized stock exchange.
Even though the shareholders own the corporation, overall control and management of it is done by a board of directors. Depending on the type of shares a stockholder owns, he may have the right to help elect the members of the board. But their authority goes no further. A corporation is managed typically by a president, chief financial officer, vice-presidents among others appointed by the board of directors. These officers must report ultimately to the board of directors.
The Pros of Corporations
- Has an unlimited lifetime. It is not terminated due to death of shareholders, its owners. Rather, those shares are passed on to their heirs
- Can fund their business through issuing shares to a massive number of invcstors
- Subject to tax on their income separately from shareholders. Part of the corporation’s income is distributed to shareholders in the form of dividends for which the shareholders are taxed. This often means more tax is paid by the shareholders than would be paid by a proprietor or partner in a similar business.
The Cons of Corporations
- The interests of management and the interests of stockholders may conflict.