Chapter 14 - Corporations Part 1

CORPORATE FORM OF ORGANIZATION A corporation is a legal entity created by law that is separate and distinct from its owners

CHARACTERISTICS Separate legal existence Limited liability of shareholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management Government regulations Additional taxes

ADVANTAGES AND DISADVANTAGES OF A CORPORATION Advantages Disadvantages Corporate management - professional managers Separate legal existence Limited liability of shareholders Deferred or reduced income taxes Transferable ownership rights Ability to acquire capital Continuous life Corporation management - ownership separated from management Increased costs and complexity to adhere to government regulation Potential for additional income taxes

ORGANIZATION COSTS Costs incurred in forming a corporation are called organization costs. These costs include fees to underwriters, legal fees, incorporation fees, and promotional expenditures. Organization costs are normally expensed in the year the organization cost is incurred.

SHAREHOLDER RIGHTS To raise capital, the corporation sells shares If only one class of shares-common shares Ownership rights specified in articles of incorporation or by-laws Voting…owners

SHARE TERMINOLOGY Authorized shares – maximum amount of shares a corporation is allowed to sell as authorized by corporate charter Issued shares – number of shares sold

SHARE ISSUE CONSIDERATION How many shares should be authorized for sale? How should the shares be issued? At what price should the shares be issued? What value should be assigned to the shares?

STOCK MARKET PRICE Shares of publicly held companies are traded on organized exchanges at dollar prices per share established by the interaction between buyers and sellers