UNCERTAINTY: The possibility that any number of things could happen in the future. In other words, the future is not known. This should be compared with risk, which is assigning probabilities to alternative possibilities.
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A business established through ownership shares (termed corporate stock) with limited liability of company debts by the owners. A corporation is considered a distinct legal person, separate from its owners. As such, the owners have limited liability. They are only liable for the value of the ownership share and cannot be held personally responsible for any corporate debts. A corporation is one of the three basic forms of business organization. The other two are proprietorship and partnership. A corporation is a business characterized by the sale of ownership shares and limited liability of the owners. Each owner is only responsible for the value of their share of ownership in the company. This form of business organization makes it possible to accumulate large amounts of funds that can be used to purchase large amounts of capital.
The Wacky Willy CompanyOne example of a corporation is provided by The Wacky Willy Company. This hypothetical Shady Valley corporation was established by the fictional William J. Wackowski to facilitate the production of Wacky Willy Stuffed Amigos (a lineup of lovable stuffed desert creatures). Bill Wackowski began the business as a proprietorship, with nothing more than a used sewing machine in the corner of his basement, but as sales expanded, he converted his business to a corporation.
Establishing The Wacky Willy Company as a corporation involved a little paper work with the government, especially writing up a corporate "charter" and registering a tax identification number. It also involved issuing "ownership" shares in the business (corporate stock). Wacky Bill kept a substantial amount of this stock, but sold some to others including his sister Wanda Wackowski noted financier Winston Smythe Kennsington III, and his next door neighbor Phil Gardener.
The Wacky Willy Company grew to become a hypothetical multinational corporation, with production facilities around the globe and ownership shares regularly exchanged through the organized stock markets.
Ownership SharesA key feature of corporations, such as The Wacky Willy Company, is that ownership is achieved through shares of corporate stock. Each share of stock designates a fraction of the ownership of the business. The Wacky Willy Company, for example, has 1 million shares of corporate stock, meaning that each share gives the owner one-millionth ownership interest in the company. The founder and president, Wild Bill Wackowski, owns 500,000 shares, meaning he lays claim to 50 percent ownership in the corporation.
As a general rule, ownership in a company can be transferred through the sale of this corporate stock. For most corporations, this transfer can be accomplished without the knowledge of those managing the company. That is, Phil Gardener can sell his one share of stock in The Wacky Willy Company to Becky Carpenter without asking permission from President Wackowski. Such a change in ownership is not possible with a partnership.
This process gives rise to organized stock market exchanges, such as the New York Stock Exchange and the National Association of Securities Dealers, that specialize in the transfer of ownership of corporate stock. Those who buy and sell corporate stock often look to this financial asset as a means of investment, with the return based on both dividends paid by the corporation and changes in the value of the stock.
Limited LiabilityA critical feature of corporations is limited liability of the owners. Limited liability means that the owners are NOT held personally responsible for the debts created by the business. For a corporation, the liability of the owners is limited to the amount that is invested in the business. The personal assets and wealth of the owners cannot be used to pay off any and all debts.
For example, Becky Carpenter is personally liable ONLY for the value of the one share of ownership she has in The Wacky Willy Company. This one share of stock (based on the current closing stock price of The Wacky Willy Company) has a value of $101.57. This is the FULL extent of Becky's personal liability. Should The Wacky Willy Company incur billions of dollars of debt, forcing the company to sell off assets, close factories, lay off employees, and eventually go out of business, the absolute most that Becky can lose is the $101.57 value of her one share of stock. If the company goes out of business, then her stock becomes worthless.
The credit collectors CANNOT seek additional payments from Becky. She will NOT need to withdraw money from her bank account, take on an extra job, or hold a rummage sale, to raise any extra funds. Her liability is limited to the value of her stock.
Size UnlimitedLimiting personal liability to the value of the ownership shares makes it possible for corporations to accumulate amounts of funds (money) and thus gain control over large quantities of productive resources. Rather than relying ONLY on the resources owned by one person (as with a proprietorship) or that owned by a handful of people (as with a partnership), corporations have almost no limits to the accumulation of productive resources.
For example, if The Wacky Willy Company sells 1 million shares of ownership stock to 1 million people each paying $100, then it can accumulate $100 million dollars of money that can be used to build factories, purchase equipment, hire employees, and buy material inputs. Should problems arise, each person is liable ONLY for $100.
In contrast, if company founder Bill the Wackmeister operated the company as a proprietorship, then he would need to accumulate $100 million of personal wealth to acquire the same amount of productive assets. A partnership is a little easier, but not much. Should Willy the Wackman form a partnership with one other person, then each would need ONLY $50 million of personal wealth, half as much, but sill substantial. And if problems arise, William (and any partners) stand to lose everything--company and personal assets.
The ease of accumulating large amounts of resources means corporations can take advantage of large scale production. Larger factories generally mean average production cost declines with increased production. Although the size of a corporation is not really "unlimited," corporations can be significantly bigger than either proprietorships or a partnerships.
Overall, larger scale production of corporations is a major reason that modern economies have enjoyed prosperity and high living standards.
The DownsideWith larger size, however, come a few problems.
- First, larger corporations, like any large organization, tend to suffer from bureaucratic inefficiencies. Information can be miscommunicated through the layers of administration. Individual employees have less incentive to do what is best for the company and can avoid taking responsibility for their actions.
- Second, larger corporations are likely to have a separation of ownership from control. The owners of a corporation (millions of a stock shareholders) often have virtually no say in the day-to-day operation of the company. Those who manage the company might pursue personal goals (higher salaries, plush offices) rather than company goals (more profit).
The Other TwoCorporation is one of three basic types of business organization. The other two are proprietorship and partnership.
- Proprietorship: A business owned and operated by one person. The owner and the business are legally considered one and the same. As such, the owner receives any and all profit and has what is termed unlimited liability. With unlimited liability, the owner is held personally responsible for any and all debts of the business. While a large number of businesses in the economy are proprietorships, they tend to be relatively small.
- Partnership: A business owned and operated more or less equally by two or more people. Like proprietorship, the owners and the business are legally considered one and the same. As such, each owner also has unlimited liability, which means that any owner is held personally responsible for any and all debts of the business, including those of a partner. This form of business is common for professional-types, including lawyers, accountants, dentists, and physicians.
S and C CorporationsCorporations come in a couple of varieties. The standard corporation is technically termed a C corporation. It is so named because it is organized according to subchapter C of the Internal Revenue Service tax code. An alternative is an S corporation, which is so designated because it is set up according to subchapter S of the tax code.
A few of the differences between S and C corporation are:
- First, S corporations are designed for smaller operations, providing an alternative to partnerships and proprietorships. C corporations can be big or small.
- Second, the income (or profit) of an S corporation is taxable as income of the owners with personal income taxes. The profit of a C corporation is taxed at the corporate level, then any income paid to the owners as dividends is also subject to personal income taxes.
- Third, while almost anyone can have shares of ownership in a C corporation, ownership restrictions apply to an S corporation.
CORPORATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 26, 2024].
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