Chapter 11: Corporate Form of Organization

Key Characteristics and Organization of Corporations 1. Corporation as a Legal Entity: o A corporation operates as a separate legal entity from its owners (shareholders), granting it rights similar to an individual, such as owning property, entering contracts, and facing liabilities independently from its shareholders. 2. Types of Corporations: o Privately Held: Stocks are not available to the public and ownership typically includes a small number of shareholders. o Publicly Held: Stocks are publicly traded on stock markets (e.g., NYSE, NASDAQ) and can have many shareholders. 3. Advantages of Corporations: o Separate Legal Entity: Operates independently, with management acting on behalf of the corporation. o Limited Liability: Shareholders are not personally liable for corporate debts beyond their investment. o Transferable Ownership: Share transfers do not affect corporate operations directly. o Continuous Life: A corporation exists perpetually, unaffected by changes in ownership. o No Mutual Agency: Shareholders do not have the authority to act on behalf of the corporation. o Capital Accumulation: Corporations can raise significant capital by issuing stock, attracting investors due to the advantages above. 4. Disadvantages of Corporations: o Government Regulation: Subject to strict laws and regulatory compliance. o Double Taxation: Corporate profits are taxed at the corporate level, and dividends are taxed again as personal income for shareholders. Organization and Management Structure 1. Incorporation Process: o Formation begins by filing a charter application with the state. Upon approval, the corporation is created, stockholders elect a Board of Directors to oversee operations, and management is appointed. 2. Organization Expenses: o Initial costs, such as legal and promotional fees, are classified as organization expenses and recorded as incurred. 3. Corporate Management: o Board of Directors: Elected by shareholders, the board governs corporate policies and selects key executives, including the CEO and vice presidents overseeing departments like finance and marketing. 4. Voting and Proxy: o Shareholders vote on significant issues and can assign their voting rights to an agent through a proxy. Stockholders and Stock Structure 1. Rights of Stockholders: o Voting: One vote per share in elections and major corporate decisions. o Dividends: Entitled to a share of corporate earnings as dividends. o Preemptive Right: First right to purchase new shares issued to maintain proportional ownership. o Residual Claims: Share in remaining assets after liquidation. 2. Stock Certificates: o Although increasingly rare, corporations may issue certificates as proof of ownership, listing shareholder information and the number of shares. 3. Registrar and Transfer Agent: o For publicly traded stock, a registrar maintains a record of stockholders, and a transfer agent facilitates the buying and selling of shares. 4. Types of Stock: o Common Stock: Typically represents ownership with voting rights. o Preferred Stock: May carry different privileges but typically lacks voting rights. 5. Par Value, No-Par, and Stated Value Stock: o Par Value: A nominal value assigned per share in the corporate charter, used as a minimum legal capital. o No-Par Stock: Issued without an assigned nominal value, providing flexibility in equity structure. o Stated Value: An assigned value for no-par stock used as minimum capital for reporting purposes. 6. Stockholders’ Equity: o Paid-in Capital: Total capital received from stock issuance. o Retained Earnings: Accumulated profits not distributed as dividends. 7. Issuance of Stock: o Stock can be issued at par, above par (premium), or below par (discount, if permitted by state law). Proceeds above par or stated values are recorded in Paid-In Capital in Excess of Par/Stated Value. Practical Application 1. Recording Stock Issuances: o o Transactions involving cash or noncash assets for stock are recorded in the equity accounts at par, premium, or stated values based on the issuance terms. Specific entries are used to record stock issuance, reflecting the value received and par value accounted for in equity.