Corporations in the United States

Although there are many small and medium-sized companies, big business units play a dominant role in the American economy. There are several reasons for this. Large companies can supply goods and services to a greater number of people, and they frequently operate more efficiently than small ones. In addition, they often can sell their products at lower prices because of the large volume and small costs per unit sold. They have an advantage in the marketplace because many consumers are attracted to well-known brand names, which they believe guarantee a certain level of quality.

Large businesses are important to the overall economy because they tend to have more financial resources than small firms to conduct research and develop new goods. And they generally offer more varied job opportunities and greater job stability, higher wages, and better health and retirement benefits.

Nevertheless, Americans have viewed large companies with some ambivalence, recognizing their important contribution to economic well-being but worrying that they could become so powerful as to stifle new enterprises and deprive consumers of choice. What's more, large corporations at times have shown themselves to be inflexible in adapting to changing economic conditions. In the 1970s, for instance, U.S. auto-makers were slow to recognize that rising gasoline prices were creating a demand for smaller, fuel-efficient cars. As a result, they lost a sizable share of the domestic market to foreign manufacturers, mainly from Japan.

In the United States, most large businesses are organized as corporations. A corporation is a specific legal form of business organization, chartered by one of the 50 states and treated under the law like a person. Corporations may own property, sue or be sued in court, and make contracts. Because a corporation has legal standing itself, its owners are partially sheltered from responsibility for its actions. Owners of a corporation also have limited financial liability; they are not responsible for corporate debts, for instance. If a shareholder paid $100 for 10 shares of stock in a corporation and the corporation goes bankrupt, he or she can lose the $100 investment, but that is all. Because corporate stock is transferable, a corporation is not damaged by the death or disinterest of a particular owner. The owner can sell his or her shares at any time, or leave them to heirs.

The corporate form has some disadvantages, though. As distinct legal entities, corporations must pay taxes. The dividends they pay to shareholders, unlike interest on bonds, are not tax-deductible business expenses. And when a corporation distributes these dividends, the stockholders are taxed on the dividends. (Since the corporation already has paid taxes on its earnings, critics say that taxing dividend payments to shareholders amounts to "double taxation" of corporate profits.)

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Next Article: Ownership of Corporations

This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.