Corporations: Organization, Stock Transactions, and Dividends

1. Corporations: Organization, Stock Transactions, and Dividends LO 1 – Understanding the Nature of a Corporation

2. LO 1 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.

3. LO 1 Characteristics of a Corporation • The stockholdersor 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 publiccorporations.

4. LO 1 Characteristics of a Corporation • 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.

5. 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.

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

7. LO 1 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.

8. LO 1 Characteristics of a Corporation (continued)

9. LO 1 Characteristics of a Corporation

10. LO 1 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.)

11. LO 1 Forming a Corporation

12. 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.

13. 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: