Page 158 - Business Principles and Management

Chapter 6 • Corporate Forms of Business Ownership

6.2 Close and Open Corporations

Goals Terms
• Distinguish between close and • close corporation (closely
open corporations. held corporation)
• Explain the major advantages of • open corporation
the corporate form of business. (publicly owned
• Explain the major disadvantages corporation)
of the corporate form of business. • prospectus

Close and Open Corporations

A close corporation (also called a closely held corporation) is one that does
not offer its shares of stock for public sale. Just a few stockholders own it;
some of them may help run the business in the same manner that partners
operate a business. York, Burton, and Chan, Inc., is an example of a close
corporation. The three former partners own all the stock and operate the
business as well.
In most states, a close corporation does not need to make its financial activities
known to the public. Its stock is not offered for general sale. It must, however,
prepare reports for the state from which it obtained its charter. And it must, for
tax purposes, prepare reports for all states in which it operates.
An open corporation (also called a publicly owned corporation) is one that
offers its shares of stock for public sale. One way to announce the sale of com-
mon stock to the public is with an ad in the newspaper. The corporation must
file a registration statement with the Securities and Exchange Commission
(SEC) containing extensive details about the corporation and the proposed
issue of stock. A condensed version of this registration statement, called a
prospectus, must be furnished to each prospective buyer of
newly offered stocks (or bonds). A prospectus is a formal
summary of the chief features of the business and its stock
offering. Prospective buyers can find information in the business note
prospectus that will help them decide whether or not to
buy stock in the corporation.
Open corporations often have a large number of stock-
Before investing in a corporation, it is impor-
holders, perhaps hundreds of thousands or more. Many of the
tant to analyze the company’s strategy and
stockholders in large corporations own only a few shares. But
financial history. Expense and return ratios
because of the great number of stockholders, such a corpora-
are used to evaluate companies over time
tion has a large amount of capital. When people buy stock,
and against competitors. Identify the skills
they are investing their capital (money) in the corporation. If
you will need to be a good stock purchaser.
the corporation fares well, stockholders will earn a return on
their investment by receiving dividends and by selling their
stock for more than they paid for it. If the corporation does
not do well, stockholders may receive no dividends and may

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