38 - Chapter 38 Corporations ?Formation and Financing The...

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Chapter 38 Corporations ? Formation and Financing The corporation is a creature of statute. A corporation is an artificial being, existing in law only and neither tangible nor visible. Its existence depends generally on state law, although some corporations, especially public organizations, can be created under federal law. Each state has its own body of corporate law, and these laws are not entirely uniform. Section 1: The Nature of the Corporation: A corporation can consist of one or more natural persons (as opposed to the artificial legal person of the corporation) identified under a common name. The corporation substitutes itself for its shareholders in conducting corporate business and in incurring liability, yet its authority to act and the liability for its own actions are separate and apart from the individuals who own it. (In certain limited situations, the ? corporate veil ? can be pierced; that is, liability for the corporations ? obligations can be extended to shareholders. Corporate Personnel: Responsibility for the overall management of the corporation is entrusted to a board of directors, which is elected by the shareholders. The board of directors hires corporate officers and other employees to run the daily business operations of the corporation. When an individual purchases a share of stock in a corporation, that person becomes a shareholder and an owner of the corporation. Unlike the members in a partnership, the body of shareholders can change constantly without affecting the continued existence of the corporation. A shareholder can sue the corporation, and the corporation can sue a shareholder. Corporate Taxation: Corporate profits are taxed by various levels of government. Corporations can do one of two things with corporate profits retain them or pass them on to shareholders in the form of dividends. The corporation normally receives no tax deduction for dividends distributed to shareholders. Dividends are again taxable (except when they represent distributions of capital) to the shareholder receiving them. This double-taxation feature of the corporation is one of its major disadvantages. New Dividend Rule. The Jobs Growth Tax Relief Reconciliation Act of 2003 mitigates this double taxation feature of corporations to some extent. Under this law, certain qualified dividends receive preferential federal tax treatment because the dividends are taxed at the same rate as the person ? s net capital gains (10 to 15 percent) rather than being taxed at the higher rate of the shareholder ? s ordinary income (up to 35 percent in 2005). Retained Earnings. Profits that are not distributed are retained by the corporation. These retained earnings, if invested properly, will yield higher corporate profits in the future and thus cause the price of the company ? s stock to rise. Individual shareholders can then reap the benefits of the retained earnings in the capital gains they receive when they sell their shares. Constitutional Rights of Corporations:
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38 - Chapter 38 Corporations ?Formation and Financing The...

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