Chapter Fifteen

Corporate Variations

Close Corporation

Corporation whose shares are held by a small group that is active in managing the corporation. (Also called statutory statutory close corporationclose corporation)

Characteristics of a Close Corporation Limitation on the number of

shareholders The shareholders typically enter into

agreements restricting the transfer of shares

All or most of the shareholders participate in the management of the corporation

Nonprofit corporation

Corporation formed for a purpose other than to earn profit (also called not-for-not-for-profit corporationprofit corporation)

Types of nonprofit corporations: Religious corporation Public benefit corporation Mutual benefit corporation

Parent and Subsidiary Corporations

ParentParent: : A corporation that forms another

SubsidiarySubsidiary: : A corporation formed by another

Professional Corporation

The incorporation of the practice of a professional, including a doctor or lawyer (also called professional associationprofessional association)

S Corporation

Corporation whose income is not taxed at corporate level but is passed through to its shareholders who pay taxes at their own rates

Criteria for S Corporation

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Generally has a calendar year as its tax year

Only one class of stock Not a bank, insurance company, or

domestic international sales corporation All shareholders consent to the election

Publicly Traded Corporation

SEC: Securities and Exchange Commission; federal agency charged with regulation of securities

1933 Act: Act requiring registration before issuance of securities through interstate commerce

1934 Act: Act governing resale of securities after their initial issuance

Going public: Sale of shares to the public at large

Key Features of Other Corporations A close corporation is a smaller

corporation owned and operated by a group of family and/or friends. There is usually a limit of 50 or fewer shareholders who enter into agreements restricting the transfer of shares. Close corporations are generally allowed less formality in operation than other business corporations. Slide 1 of 4

Key Features of Other Corporations A nonprofit (or not-for-profit) corporation is

one formed not to earn a profit but for some charitable or religious purpose or for the mutual benefit of its members. Stock is not sold. Memberships are often granted to the members of the nonprofit corporation. If nonprofits apply for and are granted tax-exempt status, they need not pay federal taxes. Contributions made to charitable or religious nonprofits are generally tax deductible, whereas contributions made to a mutual benefit nonprofit are deductible only if they are valid business expenses.

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Key Features of Other Corporations A subsidiary corporation is one formed by

another, the parent. The parent either owns all of the stock of the subsidiary or the vast majority of it. A parent will be liable for a subsidiary’s debts only if it dominates and controls the subsidiary such that they do not operate as two separate corporations.

A professional corporation is formed by a group of professionals, such as doctors or lawyers. The professionals retain liability for their own acts of negligence and for those performed under their supervision and authority. The corporate form has been selected for certain tax advantages and benefit plans available to corporations.

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Key Features of Other Corporations An S corporation is not a different type

of corporation but is a corporation that has qualified for special tax treatment such that none of its income is taxed at the corporate level but is passed through to the shareholders who pay tax at their appropriate brackets. An S corporation is limited to 100 shareholders who must all be individuals.

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Key Features of Other Corporations Securities (stocks and bonds) may not be

offered for sale to the public unless they are either registered with the SEC or exempt from registration.

The Securities Act of 1933 governs the initial issuance of securities, and the Securities Exchange Act of 1934 governs resale of securities and reporting by public companies.

States regulate the sale of securities through their state laws, called blue sky laws.