There are many business structures, each with different names and characteristics. One of the most popular and most talked about is the corporation. What is a corporation?
Definition: a corporation is a legal entity that is established to perform a specific business.
There are both public and private corporations. In a private corporation there are only a few closely held stockholders that may run the company. In a public corporation there are usually many stockholders that do not perform management functions for the business. It is called a public corporation because the stock is publicly traded on the stock market.
Note: It is important to note the difference between public and private corporations because that will usually change how the corporation is run. Public corporations have many stockholders that do not participate in the management of the company. However, these stockholders do vote for the board of directors, which choose high-level managers. This will make more sense one we see how a basic corporation is organized. Below is the most basic corporate structure:
This is the basic hierarchy of most corporations, the stockholders elect the board of directors, and the board of directors chooses the CEO. Underneath this structure is the rest of the organization. There are many variations of how it can be set up. Can you think of any reasons why there would be so many different structures?
Besides corporations there are two other types of businesses that you should be familiar with, at least in a general sense, sole proprietorships and partnerships.
Sole Proprietorship: A business owned and run by one person.
Partnership: A business owned by more that one person (can be more than two).
There are some key differences to these business types that are important for you to understand. One of the most important reasons why corporations are formed is for liability reasons. Corporations provide stockholders with limited liability. What that means is that if the corporation is sued, the stockholder would not be held personally liable for any damages.
This differs drastically from sole proprietorships and partnerships. Both of which can be held personally liable. So if you have a sole proprietorship or are a partner and the business gets sued, you can be held personally liable for any damages. (Personally liable means that if the damages cannot be covered by the business, your personal assets can be taken, such as your house and personal bank accounts.)
Another reason why there are different business forms is because of taxes. One person can have a sole proprietorship or a corporation. The only difference is how it is taxed. All the income from a sole proprietorship is taxed as income to the individual at personal tax rates. However, if that person had a corporation the income would be taxed at corporate rates. Partnership income is also taxed at the individual level. This will be explained in more detail next week.