WHAT IS A CORPORATION?

foreign [Music] what is a corporation does the Imperial Steel company fit your mental picture of a corporation it's big business but to corporations have to be big business take renakers Incorporated a drugstore corporations aren't always big are they and not all corporations are businesses consider for example Fairview Incorporated a town is not a business is it what about schools and colleges they are often corporations as are many churches hospitals and other non-profit organizations but business makes up the great majority of Corporations whether small or large incorporation is one way of organizing a business it is one form of business ownership in build Steel Incorporated has many of the legal rights of a person it owns the land and buildings and Equipment it can buy and sell property it can borrow money it can sue in court and be sued it carries on a business Imperial steel along with thousands of other legal persons is a part of our daily living it is a member of our society yet it is not simply this property nor is it a human being or a group of human beings it is Imperial Steel company aided with stock owned by people in widely scattered places [Music] I set a high value on my stock in Imperial Steel it pays good dividends it's a Sound Investment and now you advise me to sell it what kind of a lawyer are you Sid well you'll have to raise the cash somehow and I think the Stock's the best way your book show clearly that the store is in no position to pay for all this new equipment and decorating so you and your partners are each personally liable for the whole amount my partner you know very well they haven't got anything more to put into this business just because I have this stock and a little property I have to come to the rescue or we'll be sued just as I told you when this partnership was formed each partner is personally liable for any debt or commitment to the store as a partner you are legally Bound by such contracts to the limit of your personal assets partnership could I ever get into this I was a lot better off in the days when I ran the business myself Fairview clothing store Walter Brown proprietor a good little business all my own I was a how do you say it legally single proprietor that's it I ran that I pleased and I collected all the profits that's the way to run a business a single proprietor but you had difficulties in your one-man store your good location attracted business more business than you could handle alone besides waiting on customers and receiving and stacking Goods on the shelves you had paper trouble sales slips bills invoices man did you need help and suppose you got sick where would your one-man business be not only did you need the kind of help you can't hire you needed additional Capital to carry a larger variety of goods I needed Partners you said now I'm on the spot because of Partners water I still say a partnership was best for your kind of operation at that time you'll remember it was fairly simple once we found the right people Dependable men who had cash to invest and could do some of the work you needed there was Baker he had saved a little money while he worked 10 years as an accountant for a wholesale company you knew you could trust Baker he'd make a good partner he'd invest his cash and work as an accountant for a share of the profits and then there was Johnson he could also invest a little money and his experience as a clothing buyer for another company made him a valuable partner too we knew they'd work hard for the business because each had a personal interest in making it go as well as the ability to do the work that had to be done so you were Partners in the Fairview clothing store and with their cash and their help you were able to expand a little take on some additional lines of goods yes I think your partnership has done quite well I suppose so at least we did well until Johnson made the deal for those expensive modern fixtures a new storefront and signed commitments for more than our ready cash he was just talking to more than we can handle right now we'd like to modernize the store like that but where is the money coming from Johnson signed a contract I have to pay for it even though I'm the biggest investor in the store I can't cancel a contract for all that custom-made equipment it's just lucky for this whole partnership that I can scrape up a little more money to invest in the store but I don't want this to happen again what can I do can I get rid of my partners own the store myself again you can't afford to buy them out now can you no and I don't know that I want to with that the store needs all three of us everybody makes a mistake once in a while but I just can't be personally responsible for another one that's one of the weaknesses of a partnership isn't it Sid well maybe you better incorporate the store incorporating yes issue stock to each partner in proportion to the amount of his investment in the store with more than half the stock you would have a controlling interest voting control of the corporation which owned the store you'd share your profits with the others in proportion to their stock ownership wait a minute issues stock controlling interest that sounds like a lot of paperwork red tape oh it does get a little complicated and you may as well know there are other disadvantages you'd be paying special taxes you'd be subject to new regulations but incorporating would give you the big advantage of what you want right now limited liability look here's how it works you start with a group of people who want to invest their money in a company then these people apply for a charter as a corporation the state government issues a charter to that Corporation now that Corporation operates legally as an individual person it is not a group of people it is under the law a legal entity or the same as one person engaged in business and that person is responsible for the debts and commitments of the Fairview clothing store Incorporated look here a moment here is the Fairview clothing store as it is now with the three of you as partners suppose you all agree to dissolve the partnership and incorporate the stockholders will elect a board of directors in this case as large a stockholder you can select a board of directors yourself and your partners who will vote to make you president of the corporation that sounds very legal and complicated but if you say it's necessary and it will let me tell the corporation what to do I'm in favor of it and it will mean that none of the stockholders can be held liable for any more than his original investments sure that's what we mean by limited liability well then I think it's a good idea I do too as a matter of fact I was thinking I'd like to put some money into Fairview clothing store Incorporated looks like a good investment to me maybe you'd like to invest enough to pay for this equipment and decorating well the amount involved would still leave you with a controlling interest I'll do it let's see if we can get your partners to agree to incorporate maybe I can hang on to my stock and Imperial Steel Incorporated yes Mr Brown will remain one of the many owners of Imperial Steel Company Incorporated because the stock of this company is offered on a stock exchange to the general public it is known as an open Corporation like many large open corporations Imperial steel is not controlled by any one person stock shares are bought and sold as large and small Investments of many people the management of the company is handled for the stockholders by the elected board of directors thus by the pooling of capital at limited risk to the individual owners corporations can make a real contribution from steel clothing in a