Corporation Created by law Legal entity Has most of the rights and privileges of a person Classified by purpose and ownership Purpose - profit or nonprofit Ownership - publicly or privately held

Publicly Held Corporation... May have thousands of stockholders. Its stock is regularly traded on national securities markets. Privately Held Corporation... Usually has only a few stockholders and does not offer its stock for sale to general public.

Characteristics of a Corporation 11 1 Characteristics of a Corporation Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management Government regulations Additional taxes

Separate Legal Existence Separate and distinct from its owners. Acts under its own name. May buy, own, sell property; borrow money; enter into legally binding contracts; may sue or be sued; pays its own taxes. Owners (stockholders) cannot bind corporation unless owners are agents of the corporation.

Limited Liability of Stockholders Creditors have recourse only to corporate assets to satisfy their claims. Liability of stockholders limited to their investment in their corporation. Creditors have no legal claim on personal assets of stockholders unless fraud has occurred. Stockholders’ losses limited to amount of capital invested.

Transferable Ownership Rights Ownership evidenced by shares of stock Transfer of ownership among stockholders has no effect on corporation’s operating activities or assets, liabilities and total stockholders' equity. Corporation does not participate in transfer of ownership rights after original sale.

Ability to Acquire Capital Limited liability of stockholders coupled with transferable ownership rights make it easy to raise capital.

Continuous Life Life of corporation is stated in its charter - may be perpetual or limited to specific number of years (can be extended). Corporation is separate legal entity, thus life not affected by withdrawal, death, or incapacity of a stockholder.

Corporation Management The corporation establishes by-laws upon receipt of its charter from the state of incorporation. Stockholders manage corporation indirectly through board of directors. Board of directors formulates operating policies selects officers to execute policy and to perform daily management functions.

Corporate Organization Chart

Additional Taxes

Forming a Corporation A corporation can operate in various states (must have a license from each state in which it does business) but can be incorporated in only one state.

Stockholder Rights Once chartered, the corporation sells stock . If only one class of stock - called common stock. Ownership rights specified in the articles of incorporation or by-laws. Proof of stock ownership is a printed or engraved form known as a stock certificate.

Stockholders’ Equity Section of a Corporation’s Balance Sheet Two Parts: Paid-in (contributed) capital - Amount paid to corporation by stockholders in exchange for shares of ownership. Retained earnings (earned capital) - Earned capital held for future use in the business.

Balance Sheet (partial) Hydro-Slide, Inc. Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock $ 2,000 Paid-in capital in excess of par 4,000 Total paid-in capital $ 6,000 Retained earnings 27,000 Total stockholders' equity $33,000

Balance Sheet (partial) BEFORE TREASURY STOCK TRANSACTION Mead, Inc. Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock,$5par value, 100,000 shares issued and outstanding $ 500,000 Retained Earnings 200,000 Total stockholders’ equity $ 700,000 BEFORE TREASURY STOCK TRANSACTION

Treasury Stock... 3 Is a corporation's own stock that has been issued 11 3 Is a corporation's own stock that has been issued fully paid for reacquired by the corporation held in its treasury for future use.

Corporations Acquire Treasury Stock to... Reissue shares to officers and employees under bonus and stock compensation plans. Increase trading of company's stock in securities market in hopes of enhancing market value. Have additional shares available for use in acquisition of other companies. Reduce number of shares outstanding thereby increasing earnings per share. Prevent a hostile takeover.

Purchase of Treasury Stock On February 1, 2007, Mead acquires 4,000 shares of its stock at $8 per share. Treasury Stock 32,000 Cash 32,000

Treasury Stock The Treasury Stock account would increase by the cost of the shares purchased - $32,000. The original paid-in capital account, Common Stock, would not be affected because the number of issued shares does not change. Treasury stock is deducted from total paid-in capital and retained earnings in the stockholders' equity section of the balance sheet.

Balance Sheet (partial) AFTER TREASURY STOCK TRANSACTION Mead, Inc. Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock,$5par value, 100,000 shares issued and 96,000 outstanding $ 500,000 Retained Earnings 200,000 Total stockholders’ equity 700,000 Less: Treasury Stock 32,000 Total stockholders’ equity $ 668,000 AFTER TREASURY STOCK TRANSACTION

11 4 Preferred Stock... Capital stock that has contractual preferences over common stock in certain areas. Dividends Assets in the event of liquidation Preferred stockholders do not have voting rights.

Preferred Stock Assume Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Cash 120,000 Preferred Stock 100,000 Paid-in Capital in Excess 20,000 of Par Value--Preferred Stock (Preferred stock may have either a par value or no-par value.)

Dividend Preferences Preferred stockholders have the right to share in the distribution of corporate income before common stockholders. The first claim to dividends does not guarantee dividends.

Cumulative Dividend... Is a feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

Dividends in Arrears... Are preferred dividends that were scheduled to be declared but were not declared during a given period. Are not a liability. No obligation exists until a dividend is declared by the board of directors. Must be disclosed in the notes to the financial statements.

Liquidation Preference Is a feature that gives preferred stockholders preference to corporate assets in the event of liquidation.

Retained Earnings... 6 Is net income that is retained in the business. 11 6 Retained Earnings... Is net income that is retained in the business. The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation. Retained earnings does not represent a claim on any specific asset.

Deficit Is a debit balance in retained earnings and is reported as a deduction in the stockholders' equity section of the balance sheet.

Retained Earnings Restrictions... Are legal, contractual or voluntary circumstances that make a portion of retained earnings currently unavailable for dividends.

Stockholders’ Equity with Deficit