Page 151 - Business Principles and Management

Unit 2

a certificate of incorporation) is the official document through which a state
grants the power to operate as a corporation.
A corporation is, in a sense, an artificial person created by the laws of the state.
A corporation can make contracts, borrow money, own property, and sue or be
sued in its own name. Any act performed for the corporation by an authorized
person, such as an employee, is done in the name of the business. For example,
the treasurer of a corporation has the power to borrow money for the business.
An unauthorized employee, such as a receptionist who was hired to answer the
phone and greet visitors, could not borrow money for the corporation.
Morales further explained the important parts played by three key types of
people in corporations: (1) stockholders, (2) directors, and (3) officers.

STOCKHOLDERS Stockholders (often called shareholders) are the owners of a cor-
poration. Ownership is divided into equal parts called shares. A person who buys
one share becomes a stockholder. Therefore, thousands of people can own a cor-
poration. Each stockholder receives a certificate from the corporation, which
shows the number of shares owned. Stockholders have a number of basic rights,
including the following:
1. To transfer ownership to others.
2. To vote for members of the ruling body of the corporation and on other
special matters that may be brought before the stockholders.
3. To receive dividends. Dividends are profits that are distributed to stock-
holders on a per-share basis. The decision to distribute profits is made by
the ruling body of the corporation.
4. To buy new shares of stock in proportion to one’s present investment
should the corporation issue more shares.
A person can become a stock- 5. To share in the net proceeds (cash received from the sale of all assets less
holder in any one of hundreds the payment of all debts) should the corporation go out of business.
of major corporations. In which A stockholder does not have the same financial responsibility as a partner; that
corporations would you be
interested in owning stock? is, there is no liability beyond the extent of the stockholder’s ownership. If the
corporation fails, a stockholder can lose only the money invested.
Creditors cannot collect anything further from the stockholder.

DIRECTORS The board of directors (often shortened to directors or
the board) is the ruling body of the corporation. Board members
are elected by the stockholders. Directors develop plans and poli-
cies to guide the corporation as well as appoint officers to carry
out the plans. If the corporation is performing successfully, its
board is content to deal with policy issues and review the progress
of the company. However, if the corporation’s profits fall, or if it
experiences other serious difficulties, the board often steps in and
takes an active role in the operation of the business.
In large firms, boards generally consist of 10 to 25 directors. A
PHOTO: © GETTY IMAGES/PHOTODISC. executives from other businesses or people from nonprofit organiza-
few board members are top executives from within the corporation.
The directors often are from outside the corporation and are usually

tions, such as college professors. Often, directors are stockholders
who hold many shares. But directors need not be stockholders.
People who hold few or no shares are sometimes elected to the
board because they have valuable knowledge needed by the board to
make sound decisions. In some countries, such as Sweden, France,

138 and China, one employee of the company is also a board member.