How Corporate Works? - Finance With Atul


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Saturday, April 24, 2021

How Corporate Works?


How Corporate Works?


In blog #11 we saw what is investment but now we are going to see how a corporate works and knowledge of corporate will able you to invest wisely.


So in this brief article we're going to be discussing corporations represent a very viable form of business ownership and one that are predominantly used by many large businesses. Ones that do a higher number of sales on an annual basis and that is usually to justify the cost of utilizing this type of structure but corporations mainly refer to what we call C corporations. This is by far the most common form of a corporation there also are things like LLC's and S corporations but typically when someone uses the terminology of a corporation they're usually referring to C Corporation specifically. Although they may do it you know obviously not knowingly, so C corporations comprise the bulk of all corporations and what a C corporation does and what all corporations do for that matter is they establish the business as a separate legal entity and what that means is that the business and the owner are considered to be separate. 



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Remember in US with the sole proprietorship and a partnership the owner of the business and the business itself were considered to be kind of one in the same and so that provided you certain benefits in terms of taxes but obviously wasn't very good in terms of liability with the C corporation. We split the two and so the business exists on its own independent from the owners and this is beneficial for a number of different reasons so C corporations can essentially hold property in their in the business name they can sue. They can be sued, they can do a host of other things because they're essentially almost like a person if you will just according to kind of tax law and liability and different things and so there are separate legal entity for that very reason.


Now in order to establish a C corporation and usually all corporations for that matter now the first thing you have to do is complete what we call in Articles of Incorporation and the Articles of Incorporation simply kind of establishes the basic outline of the company. This is usually filed in the state in which you want to be incorporated in so. If you are going to be doing business predominantly in California you might incorporate in California typically for the most part Delaware is usually the most, pro corporate friendly state they have the law a lot of laws that are kind of pro-business if you will which typically runs to the detriment of employees. Now but they do that to attract corporations to settle there and so you'll find that a lot of corporations are incorporated actually in Delaware and so just an example of a couple things the Articles of Incorporation will include typically will outline. 





You know some common things like the name of the company at my outline the number of shares that it can be issued also probably outlined the name of the individuals on the Board of Directors and also specify things like location where the company's going to be based out of you know basic not anything overly specific. Once again just outlining some of the fundamental information you would need to know about a company okay and now another thing you need to complete is what we refer to as corporate bylaws? There seems to be a lot of confusion with regards to corporate bylaws and how they relate to the Articles of Incorporation they are in fact separate documents and the corporate bylaws are much more specific than the Articles of Incorporation with the Articles of Incorporation.



You get really basic information with the bylaws you're really going to outline the kind of day-to-day different rules of your company as well as the guidelines on how your company is going to keep running smoothly. If you will so some of the specific things that would be included in a in a corporate by law would be outlining the specific duties of each of the board of directors. Now you might outline specifically how do you go about electing board of directors right what's the process that you use you might go over how corporate officers are appointed specific things like how our meeting is conducted and a few other things as well right and what situations can you actually amend the corporate bylaws meaning change the rules that you've already established so they're much more specific so you're really looking at the day-to-day operations the different guidelines that help you run the company okay.


The specific guidelines rules and regulations are typically outlaw outlined in the corporate bylaws so now that we know how C corporations essentially are created we need to identify a few people that are actively involved the first one is what we refer to as the stockholder, the stockholder is actually technically the owner of a c-corp. and stockholders they purchase actual shares of ownership typically usually for a certain dollar amount for publicly traded companies you can actually purchase shares on an open market which means that the public is able to purchase them, so you put forth, let's say 50 dollars and you receive one share which is a fraction of ownership of this entire corporation and that entitles you to certain rights of course, the biggest of those is that it gives you voting rights specifically to vote on the board of directors.


Shareholders receives dividend payouts quarterly



Now because stockholders may not have the expertise necessary to run a company right they kind of pass off that that responsibility to the Board of Directors and so they appoint the Board of Directors usually through elections to actually oversee kind of the management of the company and to oversee and represent their best interests and so the board is designed to represent the interests of the shareholders or stockholders meaning the people that own shares of the actual company. So in private corporations usually by private meaning that they don't sell their stock on an open exchange and you have to obtain it through other means or a public corporation meaning you can purchase it through the New York Stock Exchange and go through a broker or a discount brokerage from like an E trade or Ascot trade or something similar.


So the board once again representing our interests designed to oversee management of the company now the board is not involved with the day-to-day decision making and so what they do is they will actually appoint our corporate officers positions like CEO for example or chief executive officer and so the board will what they do is they kind of agree on what the overall mission is of the company right so what are what is our mission as well as what are the objectives right what are our goals what are we trying to accomplish and once they've have some type of outline of that some kind of clear picture of what that looks like they will go ahead and they'll appoint corporate officers and those are the individuals that are going to run the day-to-day and so they'll maintain more detailed involvement with the company typically the corporate officers will meet with the board of directors usually at some type of regular interval maybe it's a bimonthly or monthly basis just to update them on operations so they can make sure that the company is moving in the direction that they feel is going to increase the likelihood of the business being successful but also in a manner that protects the interests of the shareholders which is what their responsibility is so.


Now  that we know the key players how a corporation is formed kind of the structure of it you know let's talk about some of the advantages and disadvantages of course know, this type of format is very complex can be very expensive so obviously there has to be some type of benefit from it otherwise who in the right mind would use it so let's first look at some of the advantages the biggest and most notable is going to be limited liability because there is a separation between the business and the owners, the owners essentially which once again owners of the company are going to be stockholders are only liable for the money that it commits or invest so for example if you purchase stock in a publicly traded corporation like a Walmart or McDonald's and you invest let's say a thousand dollars and for some reason that company you know comes on hard times can no longer operate and has to liquidate everything and declares bankruptcy and then goes through liquidation creditors.



Basically people that those companies owe money to that want to get paid back can't pursue you for anything you are only responsible for the money that you invest initially which would be your thousand dollar investment that's gone you can't get it back but you can't be pursued for your personal assets which is certainly a benefit and so that protects us in some way so we can invest in some of these companies but we don't incur a great deal of risk and so that is a significant benefit. Another benefit is that you do have a sense of what we call permanence because the owners are our stockholders right so we have shares of ownership if any of single-person you know or to or to pass away that doesn't affect the extent to which the business continues to operate which is certainly a good thing and so the business will continue to run despite maybe one of the owners unfortunately passing away whereas with the sole proprietorship in a partnership because the business and the person the owner are the same for all intents and purposes then that creates some issues where we're running into well is the business going to continue to operate and if so how can it so those are probably some of the more significant advantages of C corporations. 


Business Meeting


There are a few others but I just wanting to stick to some of the more prominent ones so disadvantages like all forms of ownership there are certainly disadvantages. The most notable one for a C Corp is going to be what we call double taxation and double taxation is a basic concept that basically follows the mindset that the profits of the business are going to be taxed once and then if they're paid to owners in the form of a dividend they would be taxed again. So let me try and run through this real quick we know that the money that a business brings in is obviously coined revenue, the money that flows out of the company are expenses and there obviously are several subcategories within that we're going to keep things fairly simplistic and so the difference between the two is profit on this profit, the money that organization keeps obviously it has to pay taxes so that means that the government essentially wants their fair share and so they're going to take a percentage out of that profit. The company can choose to pay what we call a dividend and so a dividend is usually a quarterly payment which means it occurs every three months and it's a way of kind of rewarding stockholders for investing in a company and so they might say alright for every share you own we're going to pay you 70 cents and so obviously if you own more shares you get more money if you don't own many shares and it's not as significant but it's a way of providing at least some guaranteed return just in case the shares don't go up in value when they in fact go down at least you get a little bit of money so you get a dividend which is great.


The only problem though is you have to claim those dividends on your tax returns so at the in the following year you're going to get a form and which is going to state that you receive X amount of dollars in the form of a dividend and you have to claim that on your personal tax return as income so it does get taxed typically it's a very low rates usually around 15% so it's a lower rate for dividends and capital gains at least for certain tax brackets but you still get taxed on it and so that's where we get the term double taxation because there is kind of one tax right here the actual business itself is paying taxes on the money and then we as stockholders are paying tax a second time on that money as well which is how you get the term double taxation so that's a significant disadvantage of a corporation.


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