Concept of the Corporation - Term Paper Example

CORPORATION Abstract The purpose of this paper is to provide a study on the corporation’s role in the economy of a country and the effect of their existence in the capital of the global market. It aims to resolve the issue on whether or not corporations render service for the common good, or are just being used as instruments to cloak wealthy investors to earn more profit. This paper shall also discuss the growth in number of virtual corporations in the future and the advantages and disadvantages of doing business with a network of independent companies linked by information technology to shares skills and access one another’s markets. Towards the end of this study, it will answer the question whether or not a corporation is a beneficial structure in the society or a despicable social structure. Introduction Corporations, large and small are the very heart of America’s and the world’s economy. More wealth is created in America and throughout the world everyday by corporations than by any other type of business. Half of the population of America and some countries all over the world are employed by corporations. Both public and private corporations are the leading providers of food, clothing, housing, transportation, entertainment, financial services, healthcare, communications, and national security items (Truitt, 2006). According to the United States Department of State, in the United States alone, most large businesses are organized as corporations. A corporation is a specific legal form of business organization, chartered by one of the 50 states and treated under the law like a person. A corporation has separate and distinct personality aside from its incorporators. They have legal rights under the law. They can sue and be sued in court, create and enter into valid contracts. The legal personality of the corporation shelters the owners from responsibility for its actions. However, the corporate veil is pierced if the corporation is used to perpetrate fraud or participate in the commission of a crime. However, the owners of a corporation also have limited financial liability and shall not be held responsible for corporate debts, which protects their personal properties from lawsuits against the corporation. A corporation has stockholder who own shares of the corporation. Thus, for instance, a shareholder subscribed and paid $100 for 10 shares of stock in a corporation and the corporation goes declares bankruptcy, the stockholder loses the $100 investment, but the stockholder’s properties are cannot be the subject of any seizure, lien or attachment, pending a court litigation against the corporation. The death or disinterest of a shareholder does not affect the corporation in any damaging way because the shares of stock are transferrable. The original stockholder is allowed under the corporation law to sell and dispose his or her shares at any time, or assign the same to the heirs upon his death.       However, apart from the corporation’s advantages, it also has some disadvantages to shoulder. Having a distinct legal personality and considered a legal entity, a corporation is required to pay taxes. A corporation also issues dividends to its shareholders, but unlike interest on bonds, these are allowed to be deductible for tax purposes as business expenses. The stockholders are the ones who shall be taxed on the dividends. Some critics have commented that this constitutes double taxation of corporate profits because the corporation already has paid taxes on its earnings and at the same time, the shareholders are still required to pay taxes on the dividends. A vast number of large corporations are owned by multiple owners, or shareholders. This widespread ownership has given many Americans a direct stake in some of the nation's biggest companies. By the mid-1990s, more than 40 percent of U.S. families owned common stock, directly or through mutual funds or other intermediaries (US Economy). How Corporations Raise Capital As a general rule, corporations are incorporated mainly for the sole purpose of earning profits. They need to raise capital in order to finance expansion in the furtherance of their business dealings. Corporations have five primary methods for obtaining that money:      1. Issuing Bonds. A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. While waiting for maturity dates, bondholders receive interest payments at fixed rates on specified dates. Bonds are also transferrable and may be sold before they actually mature on the date appearing on its face.   Corporations benefit by issuing bonds because the interest rates they must pay investors are generally lower than rates for most other types of borrowing and because interest paid on bonds is considered to be a tax-deductible business expense (US Economy). 2. Issuing Preferred Stock. A company has the option to issue new "preferred stocks” to raise capital. These stocks enjoy preference of credit compared to the common shares in the event that the corporation will experience financial difficulty. Preferred-stock owners will be paid their dividends after bondholders receive their guaranteed interest payments but before any common stock dividends are paid (US Economy).  3. Selling Common Stock. The corporation that is financially stable can raise capital by issuing common stocks. Investment banks give aid to these corporations by entering an agreement wherein they buy the shares issued at a fixed price which the public refuses at a certain minimum price. Although common shareholders have the exclusive right to elect a corporation's board of directors, they rank behind holders of bonds and preferred stock when it comes to sharing profits (US Economy). 4. Borrowing. Another way to raise revenue is for the corporation to raise short-term capital by application of loans from banks or other lenders. 5. Using profits. The corporations can finance their operations by using their retained earnings. Some corporations, especially electric, gas, and other utilities, pay out most of their profits as dividends to their stockholders. But come corporations withhold at least 50% of the retained and opt to keep the rest of the earnings to pay for operations and expansion. On the other hand, some smaller corporations prefer to reinvest most or all of their net income in research and expansion, hoping to reward investors by rapidly increasing the value of their shares (US Economy). Some corporations also get involved in Monopolies, Mergers, and Restructuring to intensify their income and capitalization. Piercing the Veil of Corporate Entity While corporations enjoy autonomy and legal personality, they are still liable for wrongful acts done by its officers when the corporation is used as a vehicle to perpetrate fraud and commit crimes. This was well-entrenched in the case of Belvedere Condominium Unit Owner’s Association V. R.E. Rouke Cos., Inc. (1993) 67 Ohio St. 3d. 274, when the Supreme Court ruled that: “The corporate veil can be pierced when the control of the corporation was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, also allow the corporate veil to be pierced in cases where control was exercised to commit unjust or inequitable acts that do not rise to the level of fraud or an illegal act”. The corporate form may be disregarded and individual shareholders held liable for wrongs committed by the corporation when: (1) Control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own; (2) Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity;, and (3) Injury or unjust loss resulted to the plaintiff from such control and wrong.  Therefore, the corporate fiction shall be regarded when it is used as a cloak to shield a wrong, perpetrate fraud or commit a crime. Hence, corporations must always act in good faith and uphold rights in the performance of its functions. Conclusion “A corporation is an organization that is a social structure that brings together human beings in order to satisfy the economic needs and wants of a community. An industrial society needs an organ that while distinct and sui generis, gave status and function that is an organ that embodies the main characteristics of traditional community and traditional society.” (Drucker, 2008). A corporation is a legal entity that is separate and distinct from its shareholders. The law grants it certain rights such as the right to sue and be sued. Large corporations usually boost the economy of the country where it was incorporated. It means a large number of jobs available for the members of the community which will help improve the economic stability of such country. However, corporations should also practice corporate social responsibility to the community and should not always focus on the amount of profit that they will earn. This raises the subject of the broader responsibilities of corporations to stakeholders, which include the customers, staff, community, government, as well as shareholders to help improve the community and do its share to work for the common good. Corporations must be given legal standing in society, provided that they follow the law in order to take pleasure from the benefits accorded to them by law. Corporations should not be used for selfish motives such as earning a sizeable amount of profit by engaging in fraudulent activities. It the corporate fiction is used to do harm to the community and its people, hence, it shall be liable for any damage caused to a corporation, individual or any of its officers and employees in general. References Drucker, Peter Ferdinand. (2008). Concept of the Corporation. John Day Company. Estes, Ralph W. (1996) Tyranny of the Bottom Line: Why corporations make Good People do Bad Things. Berret-Kohler Publishers, Inc. Gitman, Lawrence J. and Carl McDaniel. (2009) The Future of Business: The Essentials. Cencage Learning, Inc. Novak, Michael, Cooper and John Wesley. (1981) The Corporation: A Theological Inquiry. American Enterprise Institute for Public Policy Research, Syracuse University. Dept. of Religion. Truitt, Wesley B. (2006). The Corporation. Greenwood Publishing Group. US Department of State. Small Business and the Corporation. Retrieved from: < http://countrystudies.us/united-states/economy-4.htm> April 11, 2011 Read More