Stock Corporation: Everything You Need to Know
With a stock corporation, shareholders will contribute capital to the company3 min read
A stock corporation is owned by a group of shareholders. These corporations are for-profit entities, and ownership of the corporation is granted by providing shares of stock.
What is a Stock Corporation?
With a stock corporation, shareholders will contribute capital to the company. In exchange, the shareholders are given shares in the company that represent their capital contribution. Shares in stock corporations are typically provided in the form of a certificate, which makes it much easier to determine ownership of the corporation. Like any form of property, these shares can be transferred very easily, although there may be certain restrictions.
Stock shares serve a variety of purposes, some for the company and some for its owners:
- When stock shares are purchased, the money received for the shares helps to finance the company.
- The person who owns stock shares will have a say in company decisions, including the ability to cast votes at annual meetings.
- Ownership of stock shares also provides the right to receive dividends.
Basically, a trade-off occurs when shares of stock are sold. By selling stock to raise money, the corporation's board of directors gives up some of their decision-making power. Not all corporations offer stock shares. Non-profit corporations, for instance, use memberships instead of shares of stock.
The main benefit of purchasing shares in a stock corporation is being able to receive dividends, which can result in an impressive return on investment. Shares are also important because they grant owners a say in a company's directors, as well as the ability to vote on corporate policy.
A stockholder will have a controlling interest in a corporation if they own 50 percent plus one of the voting shares in the corporation. Essentially, the shareholder with controlling interests owns more voting shares than the rest of the owners, meaning they have the power to make all decisions for the corporation. Most corporations are structured as a C corporation.
Benefits of a Stock Corporation
Stock corporations are legal entities. They are considered separate from their owners and have the ability to issue unlimited shares. Stock corporations can last as long as the owners wish.
Stock corporations are the most popular type of business entity for several reasons:
- They allow owners to raise capital by selling stock.
- They can do business on a global scale.
- They have the ability to acquire other businesses for the purpose of expansion.
- They can become publicly traded at a later date if they wish.
Stock corporations are also a good choice for companies that want to pursue venture capital funding. Because corporations are separate from their owners, the company is liable for all its actions.
Shareholders of the corporation will receive limited liability protections as long as certain corporate formalities are met, such as:
- Regularly holding corporate meetings.
- Documenting the minutes of meetings to keep track of decisions.
- Using a corporate bank account to transact business.
- Filing tax returns appropriately.
- Complying with statutory requirements at the state level.
The personal assets of owners are not subject to the corporation's liabilities. The liability of shareholders is limited to what they have invested in the company. When a corporation fails to meet these requirements for corporate formality, the corporate veil can be pierced, meaning the IRS can hold corporate officers, shareholders, and directors personally liable.
The biggest disadvantage of forming a stock corporation is that these entities face double taxation. First, the corporation is taxed on any profits that it earns. Second, if the shareholders receive dividends, this money must be reported and taxed as income. Fortunately, with the right planning, corporations should be able to avoid double taxation.
Typically, stock corporations are comprised of three factions, including:
Every group in a corporation has its own duties and rights.
Shareholders Rights and Responsibilities
While shareholders are the owners of corporations, they are not responsible for managing the corporation on a day-to-day basis. Instead, shareholders will vote in a Board of Directors who will be tasked with running the company.
Shareholders have several rights exclusive to their position, such as:
- The ability to elect directors and also remove directors.
- Make amendments to the corporation's bylaws and Articles of Incorporation.
- Approval of selling corporate assets.
- Approval of reorganizations and corporate mergers.
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