@ 2012, Cengage Learning Corporations: Organization, Stock Transactions, and Dividends LO 1 – Understanding the Nature of a Corporation

Characteristics of a Corporation  A corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name.  A corporation sells shares of ownership, called stock. LO 1

Characteristics of a Corporation LO 1  The stockholders or shareholders who own the stock own the corporation. They can buy and sell stock without affecting the corporation’s operations or continued existence.  Corporations whose shares of stock are traded in public markets are called public corporations.

 Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or private corporations. The stockholders of all corporations have limited liability. LO 1 Characteristics of a Corporation

 The stockholders control a corporation by electing a board of directors. This board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. LO 1 Characteristics of a Corporation

LO 1 Characteristics of a Corporation Employees Officers Board of Directors Stockholders

Characteristics of a Corporation  A corporation has separate legal existence from its owners.  A corporation has transferable units of ownership.  A corporation has limited stockholders’ liability.  A corporation is subject to taxes. Thus, the corporate form has the disadvantage of double taxation. LO 1

Characteristics of a Corporation (continued)

LO 1 Characteristics of a Corporation

Forming a Corporation  The first step in forming a corporation is to file an application of incorporation with the state.  Because state laws differ, corporations often organize in states with more favorable laws.  More than half of the largest companies are incorporated in Delaware. (See Exhibit 3, next slide.) LO 1

Forming a Corporation

 After the application is approved, the state grants a charter, or articles of incorporation, which formally creates the corporation.  Management and the board of directors then prepare bylaws, which are operating rules and procedures for conducting the corporation’s affairs. LO 1

Forming a Corporation  Costs may be incurred in organizing a corporation, such as legal fees, taxes, license fees, and promotional costs. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below: LO 1