Economics / Unit 6: Business Organization and Labor
6.2 Corporations and Other Business Forms
Notes
A corporation is a business that the law treats as a separate legal entity, owned by stockholders (shareholders).
- Stock is a share of ownership. Shareholders elect a board of directors, which hires managers.
- Advantages: limited liability (owners can lose only what they invested), unlimited life, easy transfer of ownership, and the ability to raise large amounts of money by selling stocks and bonds.
- Disadvantages: costly to start, heavy regulation and reporting, and double taxation: the corporation pays tax on its profits, and shareholders pay tax again on dividends they receive.
- Corporations earn by far the largest share of total U.S. business revenue.
- A limited liability company (LLC) gives owners limited liability while letting profits be taxed only once, like a partnership.
- A franchise is a business that pays a parent company for the right to sell its products under its name, such as many fast-food restaurants.
- Nonprofit organizations (charities, many hospitals) and cooperatives (member-owned groups such as credit unions) do not operate mainly to earn profit for owners.
- Worked example: if a corporation has 50,000 shares and you own 1,000, you own $\displaystyle \frac{1{,}000}{50{,}000} = 2\%$ of the company.
Practice
Which is an advantage of a corporation over a sole proprietorship?
Shareholders can lose only the money they invested.
"Double taxation" of corporations means that:
The same profits are taxed at the corporate level and again at the individual level.
A woman pays a national sandwich chain a fee to use its name, recipes and logo in her own shop. Her business is a:
She buys the right to operate under the parent company's brand.
Ready for more? Take the Unit 6 test.