1. 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

2. 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.

3. Characteristics of a Corporation11 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

4. 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.

5. 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.

6. 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.

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

8. 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.

9. 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.

10. Corporate Organization Chart

12. Additional Taxes

13. 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.

14. 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.

16. 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.

17. 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 ,000
Total paid-in capital $ 6,000
Retained earnings ,000
Total stockholders' equity $33,000

18. 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 ,000
Total stockholders’ equity $ 700,000
BEFORE TREASURY STOCK TRANSACTION

19. Treasury Stock... 3 Is a corporation's own stock that has been issued11 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.

20. 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.

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

22. 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.

23. 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 ,000
Total stockholders’ equity ,000
Less: Treasury Stock ,000
Total stockholders’ equity $ 668,000
AFTER TREASURY STOCK TRANSACTION

24. 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.

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

26. 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.

27. 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.

28. 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.

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

30. 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.

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

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

33. Stockholders’ Equity with Deficit