features that distinguish a corporation from other types of business organizations
separate legal entity, continuous life and transferability of ownership, no mutual agency, limited liability of stockholders, separation of ownership and management, corporate taxation, government regulation, organization of a corporation, and capital stock
a corporation is a business entity formed under state law.
the document that gives the state's permission to form a corporation.
the states "authorizes: or approves the establishment of the corporate entity.
from a legal perspective
a corporation is a distinct entity. it is an entity that exists apart from its owners,the stockholders, or shareholders
ownership interest of a corporation
divided into a shares of stock.
how can a person become a stockholder?
by purchasing the stock of the corporation
number of stocks to sell
the corporate charter specifies how much stock the corporation is authorized to issue to the public.
they have this because regardless of changes in the ownership of the corporation, the stockholders are the owners. so unless they get together and say they want to close the corporation, then they corporations will end.
what can a stockholder do with stock
sell,trade,give,bequeath it in a will, dispose it.
no mutual agency
not present in a corporations like it is in a partnership. the stockholders of a corporations cannot commit the corporation to a contract unless that stockholder is acting as an officer in the business.
a stockholder has limited liability for the corporation's debts. unlike proprietors and partners, a stockholder has no personal obligation for corporation liabilities.
the most stockholders can lose
is the amount he or she originally paid for the stock.
combo of limited liability and no mutual agency means?
that persons can invest unlimited amounts in a corporations without fear of losing all their personal wealth because of a business failure. this feature enables a corporation to raise more money that proprietorships and partnerships
separation of ownership and management
stockholders own the business.
board of directors (elected by the stockholders) appoints corporate officers to manage the business.
do stockholders have to manage the business?
no they do not. they do not have to disrupt their personal affairs.
problems of separation of ownership and management
corporate officers may decide to run the business for their own benefit rather than the benefit of the company. stockholders may find it difficult to lodge an effective protest against management because of the distance in status.
corps are separate taxable entities. they pat a variety of taxes not born by proprietorship or partnerships.
taxes could include : ( depending on the state in which the organization incorporated and the state or states in which the corporations operates )
-annual franchise tax levied by the stated.
- federal and state income tax
this is paid to keep the corporation charter in force and enables the corporation to continue in business
federal and state income tax.
1st corporations pay their own income tax on corporate income. then the stockholders pay personal income tax on the cash dividends that they receive from corporations.
a disadvantage for cops and can be expensive for business. because stockholders have only limited liability for corporation debts, outsiders doing business with the corporation can look no further than the corporation itself for any claims that may arise against the business. to protect persons who loan money to a corporation or who invest in its stock, states monitor the affairs of corporations.
advantages of corp
1. can raise more money than proprietorship or partnership
2. has a continuous life.
3. the transfer of corporate ownership is easy
4. there is no mutual agency among the stockholders
5. stockholders have limited liability.
disadvantages of a corp
1. ownership and management are separated.
2. double taxation.
3. government regulation is expensive.
organization of a corporations
creation of a corp begins when its organizers called incorporators obtain a charter from the state.
the charter includes the authorization for the corp to issue a certain number of shares of stock which represent the ownership in the corp.
pay fees, sign the charter, and file the required documents with the state. when the first share of stock is issued, the corp is in existence. the incorporators agree to a set of bylaws which act as the constitution for governing the corporations.
the ultimate control of the corp
rests with the stockholders who normally receive one vote for each share of stock they own.
board of directors
elect officers and a chairperson. also designates the president who, as chief operating officer, manages day-to-day operations. there are also vice presidents.
authorization of stock
the state authorizes in the bylaws of a corporations how many shares of a stock class the corporation may issue.
a corp. issues this to the stockholders when they buy the stock. it represents the individual ownership of a corp's capital which. a corp may issue a stock certificate for any number of shares.
stock that represents the individual ownership of a corp's capital.
company name, stockholders name, number of shares owned by the stockholder.
stock that is held by the stockholders. outstanding stock of a corp represents 100% of its ownership
a corporation's owners' equity is called
state law requires
corporations to report their sources of capital because some of the capital must be maintained by the company.
two basic sources of corporate equity are?
1. paid in capital ( contributed capital)
represents amounts received from the stockholders.
2. retained earnings
a capital earned by profitable operations. this is internally generated capital and results from internal corporate decisions and earnings.
the main source of paid in capital. this is externally generated capital and results from transactions with outsiders.
stockholder's rights. (basic) unless a right is withheld by a contract.
1. vote. they participate in management by voting on corporate matters. the only way in which a stockholder can help to manage the corporations. each share of common stock carries one vote.
2. dividends - distributions to stockholders of assets. stockholders receive a proportionate part of any dividend. each share of stock receives an equal dividend.
3. liquidations-stockholders receive their proportionate share of any assets remaining after the corporation pays its debts and liquidates.
4. preemption- stockholders can maintain their proportionate ownership in the corporations. if you own 5% of the stocks. and the corp issues 100,000 shares then they must offer you 5% of those shares before selling it to outsiders.
classes of stock
the stock of a corp may be
1. common or preferred
2. par or no-par.
every corp issues this. it represents the basic ownership of the corporations. the real owners of the corporations are the common stockholders.
some companies issue class A common stock - carries the right to voted.
class B common stock - may be non voting.
there must be at least one voting class of stock. there is no limit as to the number or types of classes of stock that a corp may issue. each class of stock has a separate account in the company's ledger.
gives its owners certain advantages over common stock. preferred stockholders receive dividends before the common stockholders. they also get assets before, if the corp liquidates.
corps pay a fixed dividend on preferred stock which is printed on the face of the preferred stock certificate.
investors buy which stock?
usually they buy preferred stock to earn those fixed dividends. w/ these advantages preferred stockholders take less investment risk than common stockholders.
4 basic stockholder rights for preferred stock
right to vote, tho it is usually withheld from preferred stock.
dividends, liquidation, preemption.
an arbitrary amount assigned by a company to a share of its stock. most companies set par value low to avoid legal difficulties from issuing their stock below par. companies maintain a min. amount of stockholders' equity for the protection of creditors and this min. represents the corp's legal capital .
par value is arbitrary and is assigned when the organizers file the corporate charter with the state.
the value of par is made by the organizers for the corporation.
does not have par value.
some no-par value has a stated value. an arbitrary amount similar to par-value.
the state the company incorporates in will determine whether a stock may be par or stated value stock.
par is treated the same as stated value.
a company can sell its stock directly to its stockholders or use an underwriter
usually agrees to buy all the stock it cannot sell to its clients
the price that the corp receives from issuing stock
usually issue price exceeds par value because par value is normally set quite low.
JE issuing common stock at par
credit common stock
(issued common stock at par)
issuing common stock at a premium.
the amount above par is called a premium. most corps set par value low and issue common stock for a price above par.
a premium on the sale of stock
is not a gain,income, or profit for the corp because the company is dealing with its own stock.
a premium is another type of paid in capital called paid in capital in excess of par. also called additional paid in capital.
one fundamental of accounting
a company can have no profit or loss when buying or selling its own stocks.
JE issue common stock at a premium
credit common stock
credit paid in capital in excess of par-common
balance of common stock
common stock balance = number of shares issued x par value per share
paid in capital in excess of par is
the total amount received from issuing the common stock minus its par value
total paid in capital
= common stock + paid in capital in excess of par.
issuing no par stock
when a company issues no par stock. it debits the asset received and credits the stock account. for no par stock there can be no paid in capital in excess of par because there is no par to be in excess of
JE issuing no par stock
credit common stock
((issued no par common stock)
regardless of the stock's price cash is debited and common stock is credited for the cash received.
accounting no par stock with a stated value
accounting for no par stock with a stated value is almost identical to accounting for par value stock. the only diff. is that no par stock with a stated value uses an account titled paid in capital in excess of stated value to record amounts received above the stated value.
issuing stock for assets other than cash
a corp may issue tock for assets other than cash. it records the assets received at their CURRENT MARKET VALUE and credits the stock account accordingly.
JE. issuing stock for assets other than cash
credit common stock
credit paid in capital in excess of par-commo
(issued common stock in exchange for a building)
issuing preferred stock
accounting for preferred stock follows the pattern illustrated for issuing common stock.
JE issuing preferred stock
credit preferred stock
(issued preferred stock)
most preferred stock is issued at
par value. therefore paid in capital in excess of par is rare for preferred stock.
order of equity accounts
paid in capital :
paid in capital in excess of par -preferred stockholders
common stock at par value
paid-in capital in excess of par-common stockholders
retained earnings (After the paid in capital accounts)
then total stockholder's equity.
what is more permanent-PIC or retained earnings?
paid in capital is more permanent because corporations can use retained earnings for dividends which decreases the size of the company's equity.
simliar for PIC and R.E
both represent stockholders' equity of the corporation
diff for PIC and R.E
paid in capital comes from stockholders. (outside the comp)
retained earnings comes from profitable operations (inside the comp)
closing net loss and profits
debit income summary
credit retained earnings
debit retained earnings
credit income summary
net loss is not called net loss it is?
a loss may cause a debit balance in retained earnings. this condition is called retained earning deficit-is reported as a negative amount in stockholder's equity.
a profitable corporation may
distribute cash to the stockholders in form of dividends
cause a decrease in both assets and equity(retained earnings) most states prohibit using PIC for dividends. accountants use the term legal capital to refer to the portion of stockholders' equity that cannot be used for dividends. cops declare cash dividends from retained earnings and then pay with cash
a corp declares a dividend when?
before paying it.
3 dividend dates
1. declaration date - on this day the board of directors announces the intention to pay the dividend. the declaration of a cash dividend creates a liability for the corporation.
2. date of record- those stockholders holding the stock at the tend of business on the date of record will receive the dividend check.
3. payment date- payment of the dividend usually follows the record date by a week or two.
the cash dividend rate on preferred stock is
often expressed as a percentage of the preferred stock par value. but sometimes cash dividends on preferred stock are expressed as a flat dollar amount per share. therefore preferred dividends are computed 2 ways depending on how the preferred stock cash dividend rate is expressed.
2 ways to compute preferred dividends
1. outstanding shares x par value x preferred dividend rate = preferred dividend
2. outstanding shares x flat dividend rate = preferred dividend.
cash dividend on common stock
are computed the 2nd way because those cash dividends are not expressed as a percentage.
to account for declaration of a cash dividend
debit retained earnings and credit dividends payable on the date of declaration.
to pay the dividend on the payment date
debit dividends payable and credit cash
is a current liabilities. when a company has issued both preferred and common stock, the preferred stock holders get their dividend first. the common stockholders receive dividends only if the total dividend is large enough to satisfy the preferred requirement. the common stockholders get the leftovers.
dividends on cumulative and noncumulative preferred
preferred stock can be cumulative or noncumulative.
most are cumulative.
passing the dividend
when a corp fails to pay the preferred dividend . ex - it does not have cash to fund the dividend.
the dividends are now in arrears
cumulative preferred stock
shareholders must receive all dividends in arrears before the common stockholders get any dividend.