Corporations

Introduction:
A corporation is a legal organization formed with the intention of working for
profit by individuals, stockholders or shareholders. Corporations are allowed to
enter into contracts, sue and appeal, own properties, turn over federal and state
taxes and borrow money from financial institutions.
The formation of a company includes a legal process called incorporation, in
which legal documents are drawn up specifying the primary purpose of the
business, name and location and the number of shares and types of stock issued.
The incorporation process gives a distinct feature to the business entity which
protects its owners from being personally liable in the event of a lawsuit or legal
claim. A company may be formed either by a single shareholder or by multiple
shareholders who come together to follow a common objective. A corporation
can be founded as a non-profit or non-profit organization.
For-profit companies make up the majority of corporations, and they are created
to produce income and return their shareholders according to their ownership
percentage in the corporation.
Non-profit organisations work within the umbrella of charitable organizations
devoted to a specific social cause, such as purposes of education, faith, science,
or research. Instead of transferring profits to shareholders, non-profit
organizations are using their sales to achieve their goals.

Main Features of Corporation compared to Partnership and Sole

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of the business and the profits generated by it. They also assume complete
responsibility for any of its liabilities or debts. This legal form is the simplest,
providing maximum control and minimum government interference. Currently
used by more than 75 percent of all businesses, it is often the suggested way for
a new business that does not carry great personal liability threats. The owner
simply needs to secure the necessary licenses, tax identification numbers, and
certifications in his or her name, and you are now in business! The main
advantages that differentiate the sole proprietorship from the other legal forms
are (1) the ease with which it can be started, (2) the owner's freedom to make
decisions, and (3) the distribution of profits (owner takes all).
Partnership: A business owned by two or more people, who agree to share in its
profits, is considered a partnership. Like sole proprietorships, the laws do not
distinguish between the business and its owners. The Partners should have a
legal agreement that sets forth how decisions will be made, profits will be
shared, disputes will be resolved, how future partners will be admitted to the
partnership, how partners can be bought out, or what steps will be taken to
dissolve the partnership when needed. It’s difficult to think about a "break-up"
when the business is just getting started, but many partnerships split up at crisis
times and unless there is a defined process, there will be problems. They also
must decide up front how much time and capital each will contribute. Like the
sole proprietorship, it is easy to start and the red tape involved is usually
minimal. The tax structure is the same as proprietorship except in the profits and
losses of the partnership are divided by an agreed percentage by the partners.
The main advantages of the partnership form are that the business can (1) draw
on the skills and abilities of each partner, (2) offer employees the opportunity to
become partners, and (3) utilize the partners' combined financial resources.
A corporation is an entity created by law that is separate from its owners. It has
most of the rights and privileges granted to individuals. Owners of corporations
are called stockholders or shareholders. Corporations can be separated into two

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types. A privately held (or closely held) corporation does not offer its stock for
public sale and usually has few stockholders. A publicly held corporation offers
its stock for public sale and can have thousands of stockholders. Public sale
usually refers to issuance of stock and trading on an organized stock market.
Characteristics of Corporations represent an important type of organization.
Their unique characteristics offer advantages and disadvantages.
Advantages of Corporate Form Separate legal entity: A corporation conducts its
affairs with the same rights, duties, and responsibilities of a person. It takes
actions through its agents, who are its officers and managers. Limited liability
of stockholders: Stockholders are liable for neither corporate acts nor corporate
debt. Transferable ownership rights: The transfer of shares from one
stockholder to another usually has no effect on the corporation or its operations
except when this causes a change in the directors who control or manage the
corporation. Continuous life: A corporation’s life continues indefinitely because
it is not tied to the physical lives of its owners. Lack of mutual agency for
stockholders: A corporation acts through its agents, who are its officers and
managers. Stockholders, who are not its officers and managers, do not have the
power to bind the corporation to contracts—referred to as lack of mutual
agency. Ease of capital accumulation: Buying stock is attractive to investors
because (1) stockholders are not liable for the corporation’s acts and debts, (2)
stocks usually are transferred easily, (3) the life of the corporation is unlimited,
and (4) stockholders are not corporate agents. These advantages enable
corporations to accumulate large amounts of capital from the combined
investments of many stockholders.
Disadvantages of Corporate Form Government regulation: A corporation must
meet requirements of a state’s incorporation laws, which subject the corporation
to state regulation and control. Proprietorships and partnerships avoid many of
these regulations and governmental reports. Corporate taxation: Corporations
are subject to the same property and payroll taxes as proprietorships and

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partnerships plus additional taxes. The most burdensome of these are federal
and state income taxes that together can take 40% or more of corporate pretax
income. Moreover, corporate income is usually taxed a second time as part of
stockholders’ personal income when they receive cash distributed as dividends.
This is called double taxation. (Dividends are normally taxed at the individual’s
income tax rate; for “qualified” dividends, the tax rate is 0%, 15%, or 20%,
depending on the individual’s tax bracket.)
Formation
Incorporation A corporation is created by obtaining a charter from a state
government. A charter application usually must be signed by the prospective
stockholders called incorporators or promoters and then filed with the proper
state official. When the application process is complete and fees paid, the
charter is issued and the corporation is formed. Investors then purchase the
corporation’s stock, meet as stockholders, and elect a board of directors.
Directors oversee a corporation’s affairs.
Organization Expenses Organization expenses (also called organization costs)
are the costs to organize a corporation; they include legal fees, promoters’ fees,
and amounts paid to obtain a charter. The corporation records (debits) these
costs to an expense account called Organization Expenses. Organization costs
are expensed as incurred because it is difficult to determine the amount and
timing of their future benefits.
Management of a Corporation The ultimate control of a corporation rests with
stockholders who control a corporation by electing its board of directors, or
simply, directors. Each stockholder usually has one vote for each share of stock
owned. This control relation is shown in Exhibit 13.1. Directors are responsible
for and have final authority for managing corporate activities. A board can act
only as a collective body and usually limits its actions to setting general policy.
A corporation usually holds a stockholder meeting at least once a year to elect
directors and transact business as its bylaws require. A group of stockholders
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owning or controlling votes of more than a 50% share of a corporation’s stock
can elect the board and control the corporation. Stockholders who do not attend
stockholders’ meetings must have an opportunity to delegate their voting rights
to an agent by signing a proxy, a document that gives a designated agent the
right to vote the stock. Day-to-day direction of corporate business is delegated
to executive officers appointed by the board. A corporation’s chief executive
officer (CEO) is often its president. Several vice presidents, who report to the
president, are commonly assigned specific areas of management responsibility
such as finance, production, and marketing. One person often has the dual role
of chairperson of the board of directors and CEO. In this case, the president is
usually designated the chief operating officer (COO).

Stockholder Rights
Rights of Stockholders When investors buy stock; they acquire all specific
rights the corporation’s charter grants to stockholders. They also acquire general
rights granted stockholders by the laws of the state in which the company is
incorporated. When a corporation has only one
class of stock, it is identified as common stock. State laws vary, but common
stockholders usually have the general right to 1. Vote at stockholders’ meetings
(or register proxy votes electronically). 2. Sell or otherwise dispose of their
stock. 3. Purchase their proportional share of any common stock later issued by
the corporation. This preemptive right protects stockholders’ proportionate

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interest in the corporation. For example, a stockholder who owns 25% of a
corporation’s common stock has the first opportunity to buy 25% of any new
common stock issued. 4. Receive the same dividend, if any, on each common
share of the corporation. 5. Share in any assets remaining after creditors and
preferred stockholders are paid when, and if, the corporation is liquidated. Each
common share receives the same amount. Stockholders also have the right to
receive timely financial reports. Stock Certificates and Transfer Investors who
buy a corporation’s stock sometimes receive a stock certificate as proof of share
ownership. Many corporations issue only one certificate for each block of stock
purchased. A certificate can be for any number of shares. Exhibit 13.2 shows a
stock certificate of the Green Bay Packers. A certificate shows the company
name, stockholder name, number of shares, and other crucial information.
Issuance of certificates is becoming less common. Instead, many stockholders
maintain accounts with the corporation or their stockbrokers and never receive
actual certificates. Registrar and Transfer Agents If a corporation’s stock is
traded on a major stock exchange, the corporation must have a registrar and a
transfer agent. A registrar keeps stockholder records and prepares official lists
of stockholders for stockholder meetings and dividend payments. A transfer
agent assists with purchases and sales of shares by receiving and issuing
certificates as necessary. Registrars and transfer agents are usually large banks
or trust companies with computer facilities and staff to do this work.

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 Stock Issue Considerations
Capital stock is a general term that refers to any shares issued to obtain capital
(owner financing). This section introduces terminology and accounting for
capital stock. Authorized Stock Authorized stock is the number of shares that a
corporation’s charter allows it to sell. The number of authorized shares usually
exceeds the number of shares issued (and outstanding), often by a large amount.
(Outstanding stock refers to issued stock held by
Courtesy stockholders.) No formal journal entry is required for stock
authorization. A corporation must apply to the state for a change in its charter if
it wishes to issue more shares than previously authorized. A corporation
discloses the number of shares authorized in the equity section of its balance
sheet or notes. Apple’s balance sheet reports 1.8 billion common shares
authorized as of the start of its 2014 fiscal year.
Selling (Issuing) Stock A corporation can sell stock directly or indirectly. To
sell directly, it advertises its stock issuance to potential buyers. This type of
issuance is most common with privately held corporations. To sell indirectly, a
corporation pays a brokerage house (investment banker) to issue its stock. Some
brokerage houses underwrite an indirect issuance of stock; that is, they buy the
stock from the corporation and take all gains or losses from its resale.
Market Value of Stock Market value per share is the price at which a stock is
bought and sold. Expected future earnings, dividends, growth, and other
company and economic factors influence market value. Traded stocks’ market
values are available daily in newspapers such as The Wall Street Journal and
online. The current market value of previously issued shares (for example, the
price of stock in trades between investors) does not impact the issuing
corporation’s stockholders’ equity.
Classes of Stock when all authorized shares have the same rights and
characteristics; the stock is called common stock. A corporation is sometimes
authorized to issue more than one class of stock, including preferred stock and
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different classes of common stock. American Greetings, for instance, has two
types of common stock: Class A stock has 1 vote per share and Class B stock
has 10 votes per share.
Par Value Stock Par value stock is stock that is assigned a par value, which is an
amount assigned per share by the corporation in its charter. For example,
Monster Worldwide, Inc.’s common stock has a par value of $0.001. Other
commonly assigned par values are $10, $5, $1 and $0.01. There is no restriction
on the assigned par value. In many states, the par value of a stock establishes
minimum legal capital, which refers to the least amount that the buyers of stock
must contribute to the corporation or be subject to paying at a future date. For
example, if a corporation issues 1,000 shares of $10 par value stock, the
corporation’s minimum legal capital in these states would be $10,000.
Minimum legal capital is intended to protect a corporation’s creditors. Since
creditors cannot demand payment from stockholders’ personal assets, their
claims are limited to the corporation’s assets and any minimum legal capital. At
liquidation, creditor claims are paid before any amounts are distributed to
stockholders.
No-Par Value Stock No-par value stock, or simply no-par stock, is stock not
assigned a value per share by the corporate charter. Its advantage is that it can
be issued at any price without the possibility of a minimum legal capital
deficiency.
Stated Value Stock Stated value stock is no-par stock to which the directors
assign a “stated” value per share. Stated value per share becomes the minimum
legal capital per share in this case.
Stockholders’ Equity A corporation’s equity is known as stockholders’ equity,
also called shareholders’ equity or corporate capital. Stockholders’ equity
consists of (1) paid-in (or contributed) capital and (2) retained earnings; see
Exhibit 13.3. Paid-in capital is the total amount of cash and other assets the
corporation receives from its stockholders in exchange for its stock. Retained

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earnings is the cumulative net income (and loss) not distributed as dividends to
its stockholders.

Corporate Capital
Corporate capital is the mix of assets or resources a company can draw on in
financing its business. Corporate capital results from debt and equity financing.
In deciding on and managing their capital structure, a company's management
has important decisions to make on the relative proportions of debt and equity
to maintain.
A corporation has several options for sourcing capital. Equity capital is one
broad source with multiple components. Common shares and preferred
shares issued by the company, as well as additional paid in capital, are part of a
company’s equity capital. These types of equity allow outside investors the
opportunity to take partial ownership in the company. Retained earnings,
accumulated profits that have been reinvested in in the business instead of paid
out to shareholders, are another form of equity.
Debt capital is money borrowed from another entity that is due to be paid back
at a later date, typically with additional interest. Borrowings include fixed
income securities such as loans, bonds, and notes payable. A company’s capital
structure might also include hybrid securities such as convertible notes.
The decisions a company makes with respect to its corporate capital can affect
both its access to and cost of financing, tax liability (because of the favorable

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tax treatment, or tax shield, that debt receives), its credit rating, and ultimately
its liquidity. In coming up with an optimal mix of debt and equity for its
corporate capital structure, companies generally give significant weight to how
much flexibility, in maintaining ownership control, financing, and managing the
business, a given structure will provide them.
Managing Corporate Capital
How a company manages its corporate capital can reveal a lot about the quality
of its management, financial health, and operational efficiency. It’s also an
important part of valuation. For example, a company whose retained earnings
are growing might signal one with high growth prospects, for which it expects
to use those accumulated earnings. It might signal one operating in a capital-
intensive sector that needs to retain most of its profits rather than paying them
out as dividends or returning them to shareholders via buybacks. It might also
indicate a company with a lack of profitable investment opportunities. For these
reasons, retained earnings should always be reviewed in combination with other
metrics of a company’s financial health.
Key ratios to calculate for these purposes are total debt to equity, and long-term
debt to equity. Both can provide a picture of a company’s financial position by
revealing how much financial leverage or risk is present in the capital structure.
The level and trend of the ratios over time is important. It is also important to
assess how they compare to other companies operating in the same industry.
Overly leveraged capital structures can point to developing or potential liquidity
problems. Under leveraged structures might mean a company’s cost of capital is
too high.
Conclusion:
A organization is a company owned by its shareholder(s) who elects a board of
directors to oversee the operations of the organisation. The company is
responsible for the company 's acts and operations-the creditors are not.

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Corporations may be for-profit, as corporations are, or not-for-profit, as
charities usually are.
There are also two main categories of companies: Subchapter C companies,
which are larger multi-shareholder-owned entities, which may also be other
firms, and Subchapter S corporations, which are mostly (but not always)
smaller, individual-shareholder-owned.
Corporations are sometimes established in the state the company operates in,
but this does not have to be the case. Some businesses are founded in states that
are considered to be pro-business, including Delaware or Nevada, but this
requires extra paperwork. You will then register the company in the state in
which you are doing business as a foreign organization, and pay taxes to that
state.
The next step is creating Articles of Incorporation, which are filed with the state
in which you have registered the corporation. These include:
 The name and physical address of the business.
 A description of the business and its goods and services.
 The name and address of the registered agent, or the person authorized to
receive official notices.
 A count of the number of shares issued and to whom.
And then create by-laws, which are the rules of the corporation. They include, at
a minimum:
 How often the board of directors meets, and when.
 Whether the business operates on a calendar or fiscal year.
 How long board members can serve.
 Rules for changing by-laws.
By-laws can be amended as needed once the corporation is formed.

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References:
Fundamental accounting principles, John J. Wild, Ken W. Shaw, Barbara
Chiappetta
http://economia.uniroma2.it/public/ba/files/
Choosing_Your_Legal_Structure.pdf
https://www.investopedia.com/terms/c/corporate-capital.asp
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-
corporation-overview/
https://www.shopify.com/encyclopedia/corporation

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