How to set up and operate a corporation?

Suppose you decide to start a business and you believe that the corporation is the best form of ownership for your enterprise. How should you go about setting up and managing this corporation?

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You first step should be to consult an attorney. While it may be possible to incorporate the business to you, most people hire a lawyer so they can be assured that all necessary requirements are met.


The second step should be to select a state in which to incorporate. This is extremely important decision, because regulations, incorporation costs and other fees, taxes, and ownership rights vary widely. The selection of a region in which to incorporate should be made only after careful research.

Classifying corporations

Corporations can be classified as domestic, foreign, or alien. A firm is considered a domestic corporation in the region in which it is incorporated. If it is expects to be as a foreign corporation in those region. A corporation incorporated in one nation but operating in another is known as an alien corporation in the operating nation.

Johnson Products, Inc., the well-known maker of personal-care products, is incorporated in Delaware, US. But its headquarters are in Chicago where it also operates a large plant. Chicago is also home for Johnson Products subdiary, Debbie's School of Beauty Culture. The firm also operates overseas, with sales and distribution center outside the country.

Incorporating the business

Most states designated a certain official or state agency (usually the secretary of state) to administer corporations. Blank articles of incorporation corporation charters, or incorporation certificates, depending on the terminology used in a particular region, can be obtained from this official or agency. These forms must be filed with the appropriate state or region agency.

Corporate charters of the various states or region usually include similar information. In the US, Michigan articles of incorporation show the corporate name, corporate purposes, authorized capital stock, registered office and agent, and name of the incorporator. New York's certificate of incorporation shows the name of the proposed corporation, its purposes, its location, the number of shares of stock it will have the authority to issue, the address to which any process against the corporation should be sent, and the incorporator's name.

Similarly, other regions or states require the corporate name; address and name of initial agents; number, class, and par value of the stock; limitation and special rights; name and address of incorporation; board of directors’ information; corporate duration; and corporate purposes.

Stockholders

Stockholders are those people who acquire the shares of the corporation; they are its owners. Some corporations such as family businesses are owned by relativity few stockholders. In such a firm - known as closed corporation - the stockholders also control and manage the corporation's activities. But in a larger corporation - sometimes describe as an open corporation - the ownership is widely diversified.

General Motors, for example, has over 1.1 million stockholders. These people obviously have little individual control over this giant corporation. But there is ready market for their shares if they decide to sell. Adequate markets are available for the stock of large corporations, so the individual stockholder can sell the stock more easily than if the firm was a small corporation with no public market for its stock.

Corporations usually hold an annual stockholders' meeting during which management presents reports on the firm's activities. Any decisions requiring stockholder approval are put to a vote at this time. The election of certain directors and the choice of an independent public accountant are two matters that must be voted on at nearly all stockholder meetings.

Stock is usually classified as common or preferred. Owners of preferred stock have the first claim to the corporation's assets after all debts have been paid, but they usually don't have voting rights at the stock meetings. Owners of common stock have only a residual claim (after everyone else has been paid) to the firm's assets, but they have voting rights in the corporate system.

When a vote is taken, each share of common stock is worth one vote. For example, a person with 225 shares has 225 votes. If people cannot attend the stockholders' meetings, they can give their proxy authorization to vote the shares they wish to someone who will attend. Many corporate boards can vote as they choose if the proxies are not returned, thus perpetuating the board of directors' positions.

Small stockholders generally have little influence on corporate management. A holder of 200,000 shares has 200,000 votes for each director, while a holder of 50 shares has only 50 votes for each director. As a result, the issue of cumulative voting has come before many stockholder meetings. Cumulative voting allows smaller stockholders to have more influence on the selection of directors by enabling them to combine their votes. If, say, three director positions are to be filled, cumulative voting allows the holder of 50 shares the option of casting 150 votes (50x3) for one person rather than 50 votes apiece for all three.

Board of directors

The stockholders elect a board of directors, which becomes the governing authority for the corporation. The board elects its own officers - usually a chairperson, a vice-chairperson, and a secretary. Some states or region require a minimum of three directors and at least one annual meeting of the board. Most corporations, other than small or closely held ones, have large boards of directors that meet at least quarterly.

The board of directors must authorize major transactions involving the corporation and must set overall corporate policy. It’s concerned with changes in areas such as the firm's stock, financing arrangements, dividends, and major shifts in corporate holdings. But its most important role is that of hiring the corporation's top management. Even the company president is an employee of the board. Although the board hires the top executive officers, it usually leaves the selection of other managers to those executives.

In some corporations, particularly smaller ones, the board of directors plays an active role in management of the organization, but in most corporations it acts more as a review panel for management decisions. Most boards are composed of both corporation executives and outside directors (people not employed by the organization). Sometimes the corporation president is also the chairman of the board.

Management

Top management people - including the president and most vice presidents - are responsible for the actual operation of the corporation, subject to board approval. They make most of the major corporate decisions and delegate other tasks to middle management who in turn delegate to supervisory management.

Top management is responsible to the board of directors, and often sit on the board themselves. Legislation usually defines the duties of major corporate officers. Other executive posts are created by the board. The corporate organizations and its operation are outlined below. It shows the types of decisions and activities at each level in the organization.

Stockholders - to elect
Board of Directors - who assume responsibility for overall corporate policy and strategy; and hires
Top Management - who handle major corporate decisions and delegate others to
Middle Management - who handle most operating decisions, and delegate actual supervision of operative employees to
Supervisory Management

Subsidiary corporations

When all or a majority of a corporation's stock is owned by another corporation, it is a subsidiary of that corporation. The owner is usually called the parent company. Typically, the management of the parent company, subjects to the approval of the parent's board. Many well-known corporations are actually subsidiaries of other corporations. 

Corporate growth

Corporate growth has become a major economic, political, and social issue in recent years. Successful corporations traditionally have been able to expand through effective business management practices. In some cases, however, they have grown by acquiring other firms. A merger occurs when one firm purchases the property and assumes the obligations of another company.

Types of mergers

There are three categories of corporate mergers: vertical, horizontal, and conglomerate. 

A vertical merger occurs between firms at different levels in the production - marketing process. Backward vertical mergers occur when a firm acquires a supplier. Forward vertical integration occurs when a producer acquires a firm involved in the distribution channel for its particular industry. So the primary purposes of vertical mergers are to either assure adequate raw materials or distribution outlets.

A horizontal merger occurs between firms in the same industry, to diversify and offer a complete product line. Campbell Soup, for example, recently purchased Snow-King Frozen Foods, Mrs. Paul's Kitchens, Juice Bowl Products, and Costa Apple Products to broaden its supermarket offerings. The biggest horizontal merger in US history was the purchase by the Standard Oil Company of California of the Gulf Oil Corporation for $13.2 billion.

A conglomerate is a merger of unrelated firms. Allied Corporation's takeover of Bendix Corporation is a recent example. The primary purpose of most conglomerate mergers is diversification, rapid sales growth, and attempts to profitability use a cash surplus (which makes the holder a tempting target for a takeover effort).

The public debate about corporate growth

Historically, corporate growth has been seen as desirable, provided it does not restrain competition. But today some question the need for such growth. Typically, these critics argue that further enlargement will not improve the firm's productivity, and it may reduce competition in the marketplace. Corporate executives usually reply that significant economies are still available if the firm expands.

Another argument is that many times a failing firm would not survive unless it was taken over by another company. As a result, many jobs have been preserved. This type of arrangement is commonplace in the banking industry where stronger banks take over weaker ones to avoid failure.