Page 126 - Introduction to Business

100 PART 1 The Nature of Contemporary Business

the Bahamas, the Cayman Islands, Aruba, and Barbados. The Enron Corporation
formerly had 43 subsidiaries legally established in the tiny island republic of Mau-
ritius off the coast of Africa. The main draw of offshore incorporation is tax savings.
Companies argue that the corporate tax burden in the United States is too high, and
by incorporating or reincorporating in places like Bermuda, they can save millions
of dollars annually. These additional earnings go right to the bottom line and help
the company’s stock price and shareholders. For example, when a company called
the Stanley Works of New Britain, Connecticut, was recently thinking about rein-
corporating to Bermuda, it estimated it could save $30 million annually in taxes,
thus increasing its earnings per share by about 35 cents annually, which would
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result in a projected increase in its stock of about 11.5 percent. While a company’s
reincorporation in a tax haven like Bermuda may potentially be good for company
shareholders, it obviously has a negative impact on other individuals (e.g., other
taxpayers now have to carry a higher load). Incidentally, because of public pressure
from unions and other constituencies, the Stanley Works Corporation ultimately
scrapped its plan to reincorporate in Bermuda.

Classes of Stock. One key advantage in forming a corporation is the capital-
raising flexibility involved in issuing shares, or stock, in the company. In some compa-
nies there exists only one class, or type, of regular common stock. Other companies,
however, have a wide range of stock offerings including, for example, preferred stock,
which is generally a type of stock that pays a high rate of interest but confers no voting
rights on its holder. One increasingly common trend for family-owned businesses now
incorporating and going public is to issue two classes of common stock, usually Class
A and Class B. These two types of common stock are identical except that one of the
supravoting shares Shares of a classes has far superior voting rights to the other class; they are supravoting shares.
corporation’s stock that have superior The founding family issues a large number of regular common shares (Class A) to the
voting rights
general public, but by issuing itself supravoting shares, it is often able to keep voting
control of the company even though it is now a public corporation.
For example, the William Wrigley Corporation, a large chewing gum company
founded by the Wrigley family of Chicago, has just over 225 million shares out-
standing. Of these 225 million shares, a little over 180 million are regular common
Class A shares owned by the general public, each share having one vote. The com-
pany’s remaining 45 million Class B shares, however, are supravoting shares, each,
having 10 votes per share. The clear majority of these votes are in the possession,
even today, of the Wrigley family. There is thus little doubt that the Wrigley family
still controls the Wrigley Corporation even though it has evolved from a small fam-
ily business run as a sole proprietorship into a major worldwide corporation doing
close to $3 billion a year in business.

Piercing the Corporate Veil. A key advantage to incorporation is that a wall,
or “veil,” is created between the corporation’s shareholders and the business itself.
Thus, the corporation’s shareholders are not personally liable for the corporation’s lia-
bilities or debts. If a corporation, however, does not follow proper legal requirements,
pierce the corporate veil The situation that is, hold annual meetings and so on, or if large shareholders make personal use of
where creditors of a corporation are corporate property and otherwise act as if they personally are the corporation, the
able to break down the legal wall legal wall between the corporation and the shareholders will come crumbling down.
separating the corporation and its
shareholders and reach the assets of its Put another way, in such situations those owed money by the corporation may be able
shareholders to pierce the corporate veil and reach the personal assets of company shareholders.

reality Do you know the organizational form of your family physician’s office?
CH ECK To what kind of organization do you make your payments payable?

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