Corporations provide a different sort of benefit for their stockholders. Individuals can become partial owners in an enterprise without knowing a thing about business in general or about the specific service or product produced by the particular company. They become partial owners in a business that is professionally managed. Their personal assets are also shielded from any legal or financial liabilities taken on by the corporation. Like all of the corporation’s owners, they enjoy limited liability—only the money they paid for the stock is at risk. And their ownership is easily transferred. They can simply sell their stock and walk away from the business. They may not get as much as they paid for the stock, but that is all they lose in surrendering ownership.
Of course, there is a price for all of this. Since corporations are legally distinct entities, they must pay taxes like the rest of us. Corporate profits are taxed. And then, when those profits are divided up and paid out to shareholders in the form of dividends, shareholders pay income taxes on these profits once again. Shareholders must also pay taxes on any money they earn from the sale of their stock. If the selling price is greater than the purchase price, shareholders pay a tax on this difference or capital gain. But currently individuals pay a much lower tax on capital gains made on assets held for longer than one year than they do on income, shielding them from some of the pain of paying those taxes.
|The Benefits of Incorporating|
|For the founder||Limited Liability: the corporation, not the owners are responsible for all debts and obligation|
|Access to capital by selling stocks and bonds|
|Professional Management Durability—the corporation outlives its founders and shareholders|
|For the shareholder||Ownership without Expertise: individuals can acquire a stake in a business without any business knowledge or experience|
|Limited Liability: only the money shareholders invest in stock is at risk|
|Ownership is easily transferred: shareholders can withdraw simply by selling their stock|
|Income: shareholders may earn quarterly dividends and realize gains when the stock is sold|
Why It Matters Today
Over the course of the last several decades, stock ownership has become significantly more widespread. At the time of the great crash of 1929, which began the Great Depression, fewer than 1% of Americans owned any stock at all. Today, more than half of all households are invested in the stock market in some way, most commonly by owning mutual funds and 401(k) retirement plans.
The stock market -- the place where individuals can invest in corporations -- has thus become an important factor in many ordinary Americans' wellbeing.
At the same time, in recent decades returns on stock market investments have far outpaced returns on labor. In other words, it has become increasingly difficult (if not impossible) to earn a comfortable living or (especially) to enjoy a comfortable retirement on work wages or salary alone. If you're not earning investment income, you're going to have a really hard time making it in the 21st century.
So even if you don't own stocks yet, you should start figuring out how you're eventually going to buy into the market.
In “Punch Drunk”, Pennywise speaks to those who are in the markets, which may not include you:
“They're draining the banks now but no one will tell you
Cut rates and tax breaks for bosses
They're cashing their stocks in - you're cutting your losses”
It could also be a cautionary tale: know who and what you are investing in.