Certain advantages of the corporate form of business enterprise have catapulted it into a dominant sales and profit position in the United States. The corporation is by far the most effective form of business organization for raising money to finance the expansion of its facilities and capabilities. The corporation employs unique methods of finance—the selling of stocks (equity financing) and bonds (debt financing)—that enable it to pool the financial resources of large numbers of people.
A common stock represents a share in the ownership of a corporation. The purchaser of a stock certificate has the right to vote for corporate officers and to share in dividends. If you buy 1000 of the 100,000 shares issued by OutTell, Inc., then you own 1 percent of the company, are entitled to 1 percent of any dividends declared by the board of directors, and control 1 percent of the votes in the annual election of corporate officials.
In contrast, a corporate bond does not bestow any corporate ownership on the purchaser. A bond purchaser is simply lending money to a corporation. A bond is an IOU, in acknowledgment of a loan, whereby the corporation promises to pay the holder a fixed amount set forth on the bond at some specified future date and other fixed amounts (interest payments) every year up to the bond’s maturity date. For example, you might purchase a 10-year OutTell bond with a face value of $1000 and a 5 percent rate of interest. This means that in exchange for your $1000, OT promises you a $50 interest payment for each of the next 10 years and then repays your $1000 principal at the end of that period.
Financing through sales of stocks and bonds also provides other advantages to those who purchase these corporate securities. An individual investor can spread risks by buying the securities of several corporations. And it is usually easy for holders of corporate securities to sell their holdings. Organized stock exchanges and bond markets simplify the transfer of securities from sellers to buyers.
This “ease of sale” increases the willingness of savers to make financial investments in corporate securities. Besides, corporations have easier access to bank credit than do other types of business organizations. Corporations are better risks and are more likely to become profitable clients of banks.
Corporations provide limited liability to owners (stockholders), who risk only what they paid for their stock. Their personal assets are not at stake if the corporation defaults on its debts. Creditors can sue the corporation as a legal entity but cannot sue the owners of the corporation as individuals.
Because of their ability to attract financial capital, successful corporations can easily expand the scope of their operations and realize the benefits of expansion. For example, they can take advantage of mass-production technologies and division of labor. A corporation can hire specialists in production, accounting, and marketing functions and thus improve efficiency.
Unlike sole proprietorships and partnerships, the corporation has a life independent of its owners and its officers. As a legal entity, corporations are immortal. The transfer of corporate ownership through inheritance or sale of stock does not disrupt the continuity of the corporation. Corporations have permanence that lends itself to long-range planning and growth. This permanence and growth explains why virtually all the nation’s largest business enterprises are corporations.
Wishing you all a wonderful week.