3.
Characteristics of a
Nature of a Corporation
Corporation a. Separate Legal Existence
● Corporation is independent from its
owners (stockholders)
1. Overview
● It continues even if ownership
changes
A corporation is one of the most common
forms of business organization, especially
for large businesses.
● In the U.S., corporations generate b. Ability to Raise Capital
more than 90% of total business
● Corporations can issue stock
dollars
(shares of ownership)
● Small businesses are usually
● This allows them to raise large
organized as:
amounts of money
○ Sole proprietorships
○ Partnerships
○ Limited liability companies
(LLCs)
c. Ownership by Stockholders
● Owners are called stockholders or
shareholders
2. Definition of a ● They own the corporation through
shares
Corporation ● They can freely buy and sell shares
(especially in public corporations)
A corporation is a legal entity separate
and distinct from its owners. Types of corporations:
This means it can: ● Public corporations – shares
traded in public stock markets
● Own and sell property
● Private (nonpublic) corporations –
● Enter into contracts
shares held by a small group of
● Incur liabilities
investors
● Sue and be sued
● Issue stock (shares of ownership)
d. Limited Liability
● Stockholders are not personally
responsible for corporate debts
● Their loss is limited to their ● Separate legal existence – legally
investment in stock independent from owners
● Creditors can only claim corporate ● Continuous life – not affected by
assets, not personal assets changes in ownership
● Easy capital raising – can sell
shares to investors
● Transferable ownership – stocks
e. Separation of Ownership and can be easily bought and sold
Management ● Limited liability – protects personal
assets of stockholders
● Stockholders do not manage daily
operations
● They elect a Board of Directors
● The board:
○ Sets policies
5. Disadvantages of a
○ Appoints the CEO and Corporation
officers
● Officers manage day-to-day ● Separation of ownership and
operations management
○ Managers may not always
act in shareholders’ best
interests
f. Continuous Life ● Double taxation
○ Income taxed at corporate
● Corporation continues to exist even level and again as dividends
if: ● High regulatory costs
○ Owners change ○ Must follow strict rules (e.g.,
○ Stockholders die or leave Sarbanes-Oxley Act)
g. Double Taxation
6. Organizational
Corporations are taxed twice:
Structure of a Corporation
1. Corporate income is taxed at the
Hierarchy:
company level
2. Dividends are taxed again at the
1. Stockholders (owners)
stockholder level
2. Board of Directors (policy makers)
3. Officers (management/CEO)
4. Employees (operations)
4. Advantages of a
Corporation
Forming a 3. Bylaws
Corporation After incorporation:
● The board of directors and
management create the bylaws
1. Application for ● Bylaws are the internal rules and
Incorporation procedures of the corporation
● The first step is to file an Bylaws cover:
application for incorporation with
the state. ● How meetings are conducted
● Each state has different ● Roles of officers and directors
incorporation laws. ● Decision-making procedures
● Companies often choose states with ● Other operational rules
favorable laws.
○ Example: Delaware is
popular because of its
business-friendly regulations. 4. Organizational Costs
● More than half of the largest
companies in the U.S. are Starting a corporation involves formation
incorporated in Delaware. costs, such as:
● Legal fees
● State incorporation fees
2. Approval and Legal ● Taxes
● License fees
Creation ● Promotional/registration costs
Once the application is approved: Accounting treatment:
● The state issues a charter or ● These costs are recorded as
articles of incorporation Organizational Expenses
● This document legally creates the
corporation
Articles of Incorporation include:
5. Example Note
● Name of the corporation (Incomplete in Source)
● Purpose of the business
● Number of authorized shares ● The text begins an example:
● Other basic structural details “To illustrate, a corporation’s
organizing costs of $8, …”
● (The full amount and explanation are ● Outstanding stock
cut off in your provided text.) ○ Shares currently held by
stockholders
○ Issued stock minus
Paid-In Capital reacquired (treasury) shares
from Stock 📌 Relationship:
Authorized ≥ Issued ≥ Outstanding
1. Sources of
Stockholders’ Equity b. Stock Certificates
Stockholders’ equity has two main sources: ● Proof of ownership of shares
● Includes:
● Paid-in Capital (Contributed
○ Company name
Capital) – from issuing stock
○ Stockholder name
● Retained Earnings – from
○ Number of shares owned
accumulated profits
● May show:
👉 Main focus here: Paid-in capital from ○ Par value per share
issuing stock
c. Par Value and No-Par
Stock
2. Characteristics
of Stock ● Par value stock
○ Has a stated value per share
● No-par stock
○ No stated value assigned
a. Authorized, Issued, and ○ Some states require a stated
Outstanding Stock value instead
These terms describe stages of stock
circulation:
d. Legal Capital
● Authorized stock
○ Maximum number of shares
● Minimum amount of capital required
a corporation can issue
by law (in some states)
(stated in charter)
● Usually based on:
● Issued stock
○ Par value or stated value of
○ Shares actually sold or
issued shares
distributed to stockholders
● Protects creditors by ensuring a Dividend Presentation Examples:
minimum capital base
● Preferred $4 stock, $50 par
● Preferred 8% stock, $50 par
e. Rights of Stockholders
Stock ownership generally includes: 4. Dividend Rules
● Right to vote in corporate decisions ● Dividends are declared by the
● Right to share in earnings Board of Directors
(dividends) ● Not guaranteed, even for preferred
● Right to share in assets upon stock
liquidation
📌 These rights may vary depending on
stock class.
5. Cumulative vs
Noncumulative Preferred
Stock
3. Types of Stock
a. Cumulative Preferred Stock
a. Common Stock ● Missed dividends accumulate
● Unpaid dividends are called
● Basic ownership of a corporation dividends in arrears
● Equal rights for all common ● Must be paid before any common
stockholders dividends
● May sometimes have multiple
classes with different voting rights
b. Noncumulative Preferred Stock
● Missed dividends are lost
b. Preferred Stock permanently
● No obligation to pay past unpaid
● Has special “preference” rights over dividends
common stock
● Usually preferred for:
○ Dividends
○ Sometimes liquidation of
assets 6. Dividend Priority (Order
of Payment)
When dividends are paid:
1. Preferred stockholders (including
arrears, if cumulative)
2. Common stockholders
7. Liquidation Priority
If a company is liquidated:
1. Creditors (first priority)
2. Preferred stockholders
3. Common stockholders
8. Example Summary
(Dividend Allocation Idea)
If dividends were not paid for prior years:
● Preferred stockholders receive all
arrears first
● Remaining dividends go to common
stockholders