Any business that wants to sell shares of stock to a number of different people does so by turning itself into a corporation. The process of turning a business into a corporation is called incorporating.
If you start a restaurant by taking your own money to buy the building and the equipment, then what you have done is formed a sole proprietorship. You own the entire restaurant yourself -- you get to make all of the decisions and you keep all of the profit. If three people pool their money together and start a restaurant as a team, what they have done is formed a partnership. The three people own the restaurant themselves, sharing the profit and decision-making.
A corporation is different, and it is a pretty interesting concept. A corporation is a "virtual person". That is, a corporation is registered with the government, it has a social security number (known as a federal tax ID number), it can own property, it can go to court to sue people, it can be sued and it can make contracts. By definition, a corporation has stock that can be bought and sold, and all of the owners of the corporation hold shares of stock in the corporation to represent their ownership. One incredibly interesting characteristic of this "virtual person" is that it has an indefinite and potentially infinite life span.
There is a whole body of law that controls corporations -- these laws are in place to protect the shareholders and the public. These laws control a number of things about how a corporation operates and is organized. For example, every corporation has a board of directors (if all of the shares of a corporation are owned by one person, then that one person can decide that there will only be one person on the board of directors, but there is still a board). The shareholders in the company meet every year to vote on the people for the board. The board of directors makes the decisions for the company. It hires the officers (the president and other major officers of the company), makes the company's decisions and sets the company's policies. The board of directors can be thought of as the "brain" of the "virtual person."
From this description, you can see that a corporation has a group of owners -- the shareholders. The owners elect a board of directors to make the company's major decisions. The owners of a corporation become owners by buying shares of stock in the corporation. The board of directors decides how many total shares there will be. For example, a company might have one million shares of stock. The company can either be privately held or publicly held. In a privately held company, the shares of stock are owned by a small number of people who probably all know one another. They buy and sell their shares amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange.
One of the big reasons why corporations exist is to create a structure for collecting lots of investment dollars in a business. Let's say that you would like to start your own airline. Most people cannot do this, because an airplane costs millions of dollars. An airline needs a whole fleet of planes and other equipment, plus it has to hire a lot of employees. A person who wants to start an airline will therefore form a corporation and sell stock in order to collect the money needed to get started.
A corporation is an easy way to gather large quantities of investment capital -- money from investors. When a corporation first sells stock to the public, it does so in an IPO (Initial Public Offering). The company might sell one million shares of stock at $20 a share to raise $20 million very quickly (that is a simplification -- the brokerage house in charge of the IPO will extract its fee from the $20 million, but let's ignore that here). The company then invests the $20 million in equipment and employees. The investors (the shareholders who bought the $20 million in stock) hope that with the equipment and employees, the company will make a profit and pay a dividend.
Another reason that corporations exist is to limit the liability of the owners to some extent. If the corporation gets sued, it is the corporation that pays the settlement. The corporation may go out of business, but that is the worst that can happen. If you are a sole proprietor who owns a restaurant and the restaurant gets sued, you are the one who is being sued. "You" and "the restaurant" are the same thing. If you lose the suit then you, personally, can lose everything you own in the process.
If you start a restaurant by taking your own money to buy the building and the equipment, then what you have done is formed a sole proprietorship. You own the entire restaurant yourself -- you get to make all of the decisions and you keep all of the profit. If three people pool their money together and start a restaurant as a team, what they have done is formed a partnership. The three people own the restaurant themselves, sharing the profit and decision-making.
A corporation is different, and it is a pretty interesting concept. A corporation is a "virtual person". That is, a corporation is registered with the government, it has a social security number (known as a federal tax ID number), it can own property, it can go to court to sue people, it can be sued and it can make contracts. By definition, a corporation has stock that can be bought and sold, and all of the owners of the corporation hold shares of stock in the corporation to represent their ownership. One incredibly interesting characteristic of this "virtual person" is that it has an indefinite and potentially infinite life span.
There is a whole body of law that controls corporations -- these laws are in place to protect the shareholders and the public. These laws control a number of things about how a corporation operates and is organized. For example, every corporation has a board of directors (if all of the shares of a corporation are owned by one person, then that one person can decide that there will only be one person on the board of directors, but there is still a board). The shareholders in the company meet every year to vote on the people for the board. The board of directors makes the decisions for the company. It hires the officers (the president and other major officers of the company), makes the company's decisions and sets the company's policies. The board of directors can be thought of as the "brain" of the "virtual person."
From this description, you can see that a corporation has a group of owners -- the shareholders. The owners elect a board of directors to make the company's major decisions. The owners of a corporation become owners by buying shares of stock in the corporation. The board of directors decides how many total shares there will be. For example, a company might have one million shares of stock. The company can either be privately held or publicly held. In a privately held company, the shares of stock are owned by a small number of people who probably all know one another. They buy and sell their shares amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange.
One of the big reasons why corporations exist is to create a structure for collecting lots of investment dollars in a business. Let's say that you would like to start your own airline. Most people cannot do this, because an airplane costs millions of dollars. An airline needs a whole fleet of planes and other equipment, plus it has to hire a lot of employees. A person who wants to start an airline will therefore form a corporation and sell stock in order to collect the money needed to get started.
A corporation is an easy way to gather large quantities of investment capital -- money from investors. When a corporation first sells stock to the public, it does so in an IPO (Initial Public Offering). The company might sell one million shares of stock at $20 a share to raise $20 million very quickly (that is a simplification -- the brokerage house in charge of the IPO will extract its fee from the $20 million, but let's ignore that here). The company then invests the $20 million in equipment and employees. The investors (the shareholders who bought the $20 million in stock) hope that with the equipment and employees, the company will make a profit and pay a dividend.
Another reason that corporations exist is to limit the liability of the owners to some extent. If the corporation gets sued, it is the corporation that pays the settlement. The corporation may go out of business, but that is the worst that can happen. If you are a sole proprietor who owns a restaurant and the restaurant gets sued, you are the one who is being sued. "You" and "the restaurant" are the same thing. If you lose the suit then you, personally, can lose everything you own in the process.
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