Companies. Corporations.

COMPANIES. CORPORATIONS.

As business became more competitive, new and more complex corporate combinations appear. Single own­erships and the partnerships have finance weaknesses and that is the reason why the corporation (company) came into existence.

The major simple forms of integration are the fol­lowing:

1. A vertical integration characterizes companies that engage in the different steps in manufacturing or marketing a product.

2. A horizontal combination brings under one control companies engaged in the sale of the same or similar products.

3. A complementary combination takes place when companies, selling allied but not competitive products, combine.

4. A conglomerate combination involves firms in widely diverse industries, such is a motor company owning a food manufacture or book publisher.

5. Of great economic importance are multinational corporations. Such companies maintain extensive business activities and large-scale production facilities throughout the world, and their revenues sometimes exceed the total revenues of some countries in which they operate.

The most common type of companies in Great Britain and other countries are registered companies, i.e. those registered in accordance with the Law of Companies. A registered company is rated as a legal person. A company, unlike proprietorships and partnerships, is usually formed for the purpose of conducting business that is separate from its owners (the shareholders) and those people who manage it. Thus companies can be distinguished as Public Limited Companies (Plc) or Private Limited Companies (Ltd). So the main difference is between pub­lic and private companies. Limited companies are also referred to as corporations in the USA, or joint-stock companies.

In limited companies, ownership is represented by shares of stock. Shares mean fractions of the company’s assets such as cash, equipment, real estate, manufactured goods, etc. A company has the same right as an individual to hold assets and property, conduct business, make contacts; it can sue, and it can be sued. A company is a single entity in the eyes of the law.

Money to operate the business is obtained by the sale of stocks and this enables the company to exist independently of its owners. The profits are distributed to the members as dividends on their shareholding. Losses are borne by the company. If the company goes out of business, the responsibility of each shareholder is limited to the amount that they have contributed; they have limited liability. Sometimes, but rarely, the shareholders’ liabilities are limited by guarantee, that is by the sum of money agreed upon by the partners. The personal assets of the owner are protected from the creditors of the company.

The stockholders do not directly manage the company. The day-to-day management of the company is carried out by a board of directors. The owners at an annual meeting elect a board of directors which has the responsibility of appointing the company president and vice-president, directors and secretaries, and setting the enterprise’s objectives.

Limited companies are at least risky from an owner’s point of view. Shareholders can only lose the amount of money they have invested in company stock. Companies can raise larger amounts of capital than proprietorships or partnerships through the addition of new investors and through better borrowing power. They find it easy to borrow money from banks. Companies are also a successful means for attracting large amounts of capital and investing it in plants, modern equipment and expensive research. Salaries large companies can offer to managers and specialists are high and that allows companies to hire professional and talented employees.

Unlike sole proprietorships and partnerships, a company continues to exist despite chang­es in (or deaths among) its owners.

The great drawback of the corporate form of ownership is double taxation of profits which means that business companies must pay taxes on their net income, and then the shareholders are to pay taxes on the income they receive as dividends on their stock. Different kinds of reports are to be filed to federal and state regulatory agencies about the company activity.

It is also more expensive and more complicated to establish companies. A charter, which requires the services of lawyers, must be obtained through the provincial or federal government. In addition to legal costs, the firm is charged incorporation fees for its charter by the authorizing government.

With diverse ownerships, companies do not enjoy the secrecy of proprietorships and partnerships. A company must send each shareholder an annual report detailing the financial condition of the firm. However, in terms of size and influence it is the company (corporation) that has become the dominant business form existing in most countries with free market economy.

Public Limited Companies (PLC)

The capital for this type of company is raised from members of the public. Public (open) companies are free to sell their shares and stocks to the gener­al public. For this reason, a plc can be listed on the stock exchange, although it doesn’t have to be. The company’s stock is available to anyone who wants to buy it. The principal owner of a public company is the majority stockholder. Before it can start doing business, a plc needs to have a minimum amount of share capital (in England for example, it needs to issue at least 50,000 pounds worth of shares). These companies are also required to publish a definite amount of information about their activity which is strictly regulated as compared to private companies. Such companies have the letters Plc after their name.

Private Limited Companies (Ltd)

There are many more private limited companies than public limited companies. Private (closed) companies cannot sell shares to or raise money from the general public (which they usually do through a stock ex­change). If one of the shareholders decides to sell stock, it is usually sold to one or the other shareholders or someone of whom they all approve. In this way, the ownership of the business is selective and controlled.

British laws specify that such a company may have up to 50 shareholders. There is no minimum amount of share capital for it, and it’s theoretically possible for a plc to have just one share held by one person. Private limited companies are often local family businesses and are common in the building, retailing and clothing industries. A private company can be formed with a minimum of two people becoming its shareholders. Such a company has Ltd (Limited) after its name.

Many large businesses in the UK are Public Limit­ed Companies (PLC): Marks & Spencer, British Telecom and the National West­minster Bank are the examples of public limited com­panies. In the US, businesses take the same basic forms. American companies have abbreviations Inc and Corp.

Other types of companies are:

1) Associated company, which is a company over which another company has substantial influence; for example it owns between 20 per cent and 50 per cent of its shares.

2) Holding company, a company that owns another company or other companies and which is sometimes referred to as the parent company (most public com­panies operate through a number of companies con­trolled by the group's holding company);

3) Subsidiary company, a company controlled by a holding company, usually because the holding compa­ny owns (or indirectly owns through another subsidi­ary) more than 50 per cent of the subsidiary compa­ny's shares.

In certain countries, notably in Britain, there is a trend towards privatization of the public sector companies owned by the government (post offices, railway and telephone companies). They are sold back to the private sector. It is positive because these companies may find themselves in competition with other firms and thus make their services more efficient and beneficial for customers; the money raised by them can be used to reduce taxes. It is negative because the private sector companies are mainly interested in making a profit, some services may become more expensive for customers; necessary services may not be provided because they are not profitable.

Companies in the public sector have certain similarities to public limited companies. However there are a few important differences:

n while plcs are owned by the public, public sector companies are owned by the government;

n the chairman of a plc is chosen by the shareholders, whereas the chairman of a public sector company is chosen by the government;

n a plc obtains capital by selling shares, a public sector company by selling stocks;

n the profits earned by a plc go to the shareholders, the profits of a public sector company go to the government;

n the main objective of a plc is to make the largest possible profit, public sector companies are created to provide the public with essential services.

STOCKS and SHARES

Mind that the words stocks and shares have certain similarities in meaning, but are not exactly the same.

Although these words are often used as synonyms there is a difference in meaning.

1. Stocks are similar to loans and pay interest. In the UK, they are known as debentures (if issued by companies) or gilts if issued by the government. The interest is usually at a fixed rate. They are a safe investment as companies are obliged to pay interest and repay the capital whether or not the firm is making a profit. However, the return on the investment is likely to be lower than on shares.

2. Shares pay dividends rather than interest and enable the bearer to own a part of the company. If a company goes bankrupt, the shareholders will only be repaid after all the other creditors. As the term equity can be defined as what remains when all other claims on a company's assets have been met, stock and equity are interchangeable terms. There are many varieties of shares; these are some of the most important.

2.1.Ordinary shares give the bearer the right to vote, appoint and remove directors and the right to receive a dividend.

2.2.Preference shares give the holder the right to receive dividends before ordinary shareholders and priority if the company is liquidated. However, the dividend is fixed.

2.3.Cumulative preference shares entitle the bearer to be paid in arrears if a dividend is not paid in any one year.

3.Stocks, shares and bonds are known collectively as securities.

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