|
The largest businesses are organized as corporations because incorporation increases the company’s ability to raise cash (or capital) by easing the transfer of ownership and limiting the liability of owners. Ownership of a corporation is divided into a large number of equal parts or shares. Shares are owned in varying numbers by the owners of the corporation called stockholders or shareholders. New corporations are highly risky ventures; many more fail than succeed. Consequently, new corporations rarely have access to the major capital markets. Instead they must rely on venture capital provided by wealthy investors and institutions prepared to assume large risks. Businesses whose stock are held by a small group of private investors and are not offered to the general public are called private or privately held corporations. Although the risk of loss is high, tremendous profits are possible from an investment in a new business that succeeds. Once a business becomes established, the owners can think about converting to a public or publicly held corporation that raises equity capital by selling stock to the general public. For example, when Google began active trading in August 2004, co-founders Larry Page and Sergey Brin retained stock worth approximately $3.85 billion each while raising about $1.67 billion in cash for the company. Nonetheless, as an investment, the stock price performance of most initial public offerings (IPOs) is mediocre at best. Research for the years 1970 to 2006 shows that IPO stock bought on the first day of trading under performs similar-sized public companies by 3.7 percent over the subsequent five years. In another study published in the Journal of Finance, 34 percent of all IPOs between 1980 and 2001 had earnings per share (EPS) less than zero. Corporations are authorized, or chartered, in accordance with the provisions of state laws that govern the structure and operation of corporations. These laws differ from state to state and a corporation can charter in any state. For instance, although Google is headquartered in Mountain View, California, it is chartered in Delaware, as are many corporations due to Delaware’s favorable laws. Although the provisions of incorporation laws vary from state to state, all states require persons who wish to form a corporation to apply to a prescribed state official for the issuance of a charter. The corporate charter, which is sometimes called the articles of incorporation, is a document that authorizes the creation of the corporation, setting forth its name and purpose and the names of the incorporators. The typical corporate charter contains provisions that describe how stock may be issued by the corporation. First, it authorizes the corporation to issue stock in a limited number of classes. It also sets an upper limit on the number of shares that the corporation may issue in each class. And finally, it sets a lower limit on the amount for which each share must be sold. This article has been compiled by Classof1.com; they offer finance assignment online help.
Related Articles -
Raising, equity, capital, within, a, corporation,
|
