Agribusiness
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LESSON L060073: CORPORATIONS
Objectives
1. Define corporation, examine the
distinguishing characteristics of a corporation,
and list the four types of corporations.
2. Describe a c corporation, and outline the
steps in forming a c corporation.
3. Describe an s corporation, and determine the
requirements that must be met to be considered
an S corporation.
4. Contrast c and s corporations.
Terms
•Board of directors
•C corporation
•Closed corporation
•Corporation
•Dividends
•Limited liability
•Limited liability company
•S corporation
•Stock
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A corporation is a form of
business where the
business organization is
chartered by a state and
acts as a separate entity
from its owners.
1. It provides limited liability to owners.
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Limited liability means the investor cannot lose more than
the amount invested.
2. A corporation has different tax structures than
other business structures.
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B. Corporation characteristics
1. Owners own shares (stock),
which signifies ownership in a
corporation.
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Ownership in the company is
determined by the amount of stock a
person owns.
For example, if a company has 10,000 shares of stock
and a person owns 500 shares, the person owns 5 percent
of the company.
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a. If a stockholder owns a
significant amount of shares, he
or she may have a vote on
company positions, such as the
board of directors who
represent the stockholders.
b. If a stockholder does not own a significant
amount of shares, he or she will not have a vote in
company decisions.
c. Corporations have a chief executive officer
(CEO) or a chief financial officer (CFO) who runs
the company on behalf of the stockholders.
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2. A corporation raises capital
by selling shares of stock.
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People invest money in the
corporation, and as the business
gains in success, the stock
value will increase.
As the stock value increases, the investors see an
increase in the value of their stock.
3. The corporation is transferable upon death
because stockholders can independently determine
the beneficiaries of their shares.
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4. Corporations do exist that do
not have shareholders because
the corporation has members.
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When this occurs, each member
has a vote in the decisions of the
corporation.
• a. This usually occurs when a corporation is not
publically traded on the stock market.
• b. Not-for-profit corporations also operate in this manner.
• A not-for-profit corporation is a business that does not have
making money as a goal.
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C. There are four types of
corporations.
1. A C corporation is the
most common form of a
corporation.
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A C corporation creates a
separate legal entity with assets
and liabilities separate from the
owners.
A C corporation has publicly
traded stock.
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a. Advantages
(1) Owners’ personal assets are protected from business
debt and liability.
• (2) Corporations have unlimited life extending beyond
the illness or death of the owners.
• (3) There are tax-free benefits, such as insurance, travel,
and retirement plan deductions.
• (4) Transfer of ownership is facilitated by the sale of
stock.
• (5) A change of ownership need not affect management.
• (6) It is easier to raise capital through a sale of stocks and
bonds.
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b. Disadvantages
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(1) It is more expensive to
form than a proprietorship or
partnerships.
(2) There are more legal
formalities.
(3) There are more state and
federal rules and regulations.
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2. An S corporation
is selected when
shareholders are
taxed as a sole
proprietor.
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An S corporation is a
corporation that
reports all profits
through its owners as
personal income.
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3. A closed corporation resembles the traditional C
corporation, but it is designed for a company with a
sole owner or a small group of owners, usually not
to exceed 30 shareholders.
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A closed corporation has one or a limited number of
shareholders.
When a shareholder wishes to leave the business, he or
she must offer the shares to existing stockholders before
selling to new shareholders.
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4. A limited liability company
(LLC) is like an S corporation.
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The LLC offers the advantage of
being taxed like a partnership.
• Multiowner LLCs also offer the
protection of limited liability.
• LLCs do not have stock.
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Steps in forming a C corporation
A. It is necessary to choose a
business name that complies with
state laws.
B. It is necessary to appoint
directors of the corporation.
C. It is necessary to file formal paperwork (articles
of incorporation) with state and federal
governments.
D. It is necessary to create bylaws that explain the
operating rules.
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E. It is necessary to hold a meeting
with the board of directors to
approve all paperwork.
F. It is necessary to issue stock
certificates to shareholders.
G. It is necessary to obtain
licenses and permits required for
the business from local, state, and
federal governments.
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To be treated as an S corporation, the following
must be met.
A. It must be a domestic corporation or LLC.
B. It must have only one form of stock.
C. It must have no more than 100 stockholders.
D. Stockholders must be U.S. citizens.
E. Profits and losses must be allocated to
stockholders proportionately according to the
amount of stock they own.
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Differences between C corporations and S
corporations
A. C corporations are allowed to keep profits.
B. C corporations are taxed on profits at corporate
rates.
C. C corporations pay dividends, and they are
taxed to the shareholders.
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Dividends are extra money made
by the corporation given back to
the shareholders.
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D. C corporations have
additional requirements (i.e.,
an annual report, board of
directors, and federal
reporting).
E. S corporations pass profits
onto shareholders, and they
pay taxes on the profits.
REVIEW
•How does a corporation work?
•How do you form a C corporation?
•What are the requirements to be an S
corporation?
•How do C and S corporations differ?