Chapter 15 – Corporate Variations

• Close Corporation – A corporation whose shares are held by a small group that is active in managing the corporation.  (Also called statutory close corporation)

Characteristics of a Close Corporation

• Limitation on the number of shareholders
• The shareholders typically enter into agreements restricting the transfer of shares
• All or most of the shareholders participate in the management of the corporation

Nonprofit corporation

• Corporation formed for a purpose other than to earn profit (also called not-for-profit corporation)
• Types of nonprofit corporations:
  • Religious corporation
  • Public benefit corporation
  • Mutual benefit corporation

501 (c)(3)

• Term used to refer to tax-exempt nonprofit corporations, after § 501(c)(3) of the Internal Revenue Code

Public Benefit Corporations

• Corporation formed primarily for charitable purposes 

Parent and Subsidiary Corporations

• Parent:  A corporation that forms another
• Subsidiary:  A corporation formed by another

Professional Corporation

• The incorporation of the practice of a professional, including a doctor or lawyer (also called professional association)
• Two distinguishing characteristics of a professional corporation:
  • Share ownership is limited to licensed professionals; and
  • Professionals retain liability for their own acts of malpractice and the acts of others under their supervision.

Criteria for S Corporation

• S corporation:  corporation whose income is not taxed at corporate level but is passed through to its shareholders who pay taxes at their own rate.
  • Generally has a calendar year as its tax year
  • Only one class of stock
  • Not a bank, insurance company, or domestic international sales corporation
  • All shareholders consent to the election

Publicly Traded Corporations

• Although public corporations represent a small percentage of all businesses in the United States, their economic impact on the country is significant.

Going Public

• When a corporation decides to sell its shares to members of the public at large, the decision is referred to as going public.
  • The first offering of the corporation’s stock to the public is referred to as the initial public offering (IPO).
  • The securities to be issued by the corporation are usually in the form of equity securities (stock representing ownership interest in the corporation) or debt securities (bonds representing money owed by a corporation to a creditor).

Securities and Exchange Commission

• Federal agency charged with regulation of securities

Key Features of Other Corporations

• A close corporation is a smaller corporation owned and operated by a group of family members and/or friends. There is usually a limit of 25 to 50 shareholders. These shareholders enter into agreements restricting the transfer of their shares. Close corporations are allowed less formality in operation than ordinary C corporations.
• A nonprofit corporation is one formed not to earn a profit but for some charitable or religious purpose or for the mutual benefit of its members. Stock is not sold. If allowed by the IRS, a nonprofit corporation is exempt from paying federal taxes.
• A benefit corporation is a hybrid corporation that combines a profit-making purpose with a social purpose. In making decisions, the directors must consider not only the interests of the shareholders but also the interests of others, including employees, suppliers, and the local and global community.
• A subsidiary corporation is one formed by another, the parent. The parent either owns all of the stock of the subsidiary or the vast majority of it. A parent will be liable for a subsidiary’s debts only if it dominates and controls the subsidiary such that they do not operate as two separate corporations.
• A professional corporation is formed by a group of professionals, such as doctors or lawyers. The professionals retain liability for their own acts of negligence and for those performed under their supervision and authority. The corporate form has been selected for certain tax advantages and benefit plans available to corporations.
• An S corporation is not a different type of corporation but is a corporation that has qualified for special tax treatment such that none of its income is taxed at the corporate level but is passed through to the shareholders who pay tax at their appropriate brackets. An S corporation is limited to 100 shareholders who must all be individuals.
• Securities (stocks and bonds) may not be offered for sale to the public unless they are either registered with the SEC or exempt from registration.
• The Securities Act of 1933 governs the initial issuance of securities, and the Securities Exchange Act of 1934 governs resale of securities and reporting by public companies.
• States regulate the sale of securities through their state laws, called blue sky laws.