1. FORMS OF BUSINESS ORGANIZATIONS LEGAL FORMS OF BUSINESS ORGANIZATION SOLE PROPRIETORSHIP ONE OWNER PARTNERSHIPS > ONE OWNER CORPORATIONS Can a partnership have 500 owners? Can a corporation have one owner? Does every business have a choice of legal form?

2. Stockholders’ Equity Corporate legal form –Advantages and disadvantages Shareholder rights Forming a corporation Components of stockholders equity –Common stock –Treasury stock –Preferred stock Dividends Stock dividends and stock splits

3. WHY LARGE BUSINESSES USE THE CORPORATE FORM CORPORATONS Advantages Limited Liability Transferability Ability to Raise Capital Disadvantages Double Taxation

4. Shareholder rights Share in dividends, if any Share in liquidation…what’s left over Preemptive right

5. Shareholder rights Elect board of directors –Make strategic decisions Outside versus inside –Majority voting: one vote per share. 51% elects all. –Cumulative voting: number of directors elected x shares = number of votes. Can vote all for one candidate –Stagger number of directors up for election “Figure heads” –Hires management to implement strategic decisions

6. Forming a corporation Select state of incorporation –Any state Organization costs –Attorney fees, filing fees, etc. –Amortized over five years Amortization expense Organization costs

7. Components of stockholders equity Capital stock –Authorized shares: number of shares company can issue Generally a very large number –Issued: transferred to shareholders IPOs: initial offering of stock to public –Expensive: fees of 6.6% of capital raised, for example –Pricing –Outstanding: still owned by shareholders

8. Components of stockholders equity Treasury stock –Stock issued but then repurchased Mature or fast growing company??? Impact on earnings per share Impact on market price –Alternative to dividends –Tax treatment

9. Components of stockholders equity Treasury stock –Purchase Treasury stock (negative owners’ equity) Cash –Sale (at “gain”…) Cash Treasury stock Paid in capital

10. Components of stockholders equity Preferred stock –Preference as to dividends Cumulative versus noncumulative –Dividends in arrears –Preference in liquidation Receive par value and any unpaid dividends before any distribution to common stockholders Relationship to creditors

11. Payment of dividends Date of declaration (by board of directors) –Retained earnings – Dividends payable (now have liability) Date of record (ex-dividend date) –Own stock on this date, get dividend –No entry required –Impact on stock price when stock goes ex-dividend Date of payment –Dividends payable – Cash

12. Stock dividends Additional shares distributed to shareholders Impact on stock price of a 10% stock dividend –Steak-N-Shake Not taxable income Investor still owns same percent of company

13. Stock dividend Entries –When stock dividend declared Retained earnings (FMV of stock) Common stock distributable (par value) Paid in capital (excess) –When stock is distributed Common stock distributable Common stock

14. Stock splits Additional shares distributed to shareholders. 2 for 1 stock split –Impact on stock price of a 2 for 1 split Signaling theory Not taxable income Investor still owns same percent of company No journal entry required