Chapter 11 Corporations Organization Stock Transactions Dividends and Retained Earnings 1 The Corporate Form of Organization a Corporation An entity separate and distinct from its owners that is created by law and subject to the same duties and responsibilities as a person i Must abide by laws and pay taxes b Classified by Purpose and By Ownership i Profit vs Non Profit ii Publically Held vs Privately Held 1 Public Has thousands of stockholders and traded on national securities exchanges 2 Private Only few stockholders and does not offer its stock for sale to the general 2 Characteristics of a Corporation public a Separate Legal Existence Separate and distinct from its owners thus acting under its own name rather than the name of the stockholders i Only shareholders who are also appointed agents may have influence over corporation b Limited Liability of Shareholders Creditors have no legal claim on the personal assets of owners unless fraud has occurred stockholder s losses are limited to their capital investment in the corporation c Transferable Ownership Rights Shares of capital stock give ownership in a corporation which are transferable units i Owners may dispose of part or all of their interest in a company just by selling their stock to another owner which does not require the approval of the corporation ii Transfer of stock does not affect corporation after first issue of stock the company does not participate in transfers d Ability to Acquire Capital Easy to obtain through issuance of stock e Continuous Life Life is stated in charter may be perpetual or limited If limited renew charter to continue life though a board of directors f Corporation Management Stockholders legally own the corporation but manage it indirectly i Board formulates operating policies and selects officers ii Stockholders B O D President C E O Rest of Board Secretary VP Marketing VP Finance CFO VP Operations VP Human Resources 1 VP Finance Treasurer Controller a Controller Chief Accounting Officer who maintains accounting records maintains adequate system of internal control prepares financial statements tax returns and internal reports b Treasurer Obtains custody of corporations funds and is responsible for maintaining company s cash position g Government Regulations State laws prescribe the requirements for issuing stock distributions of earnings permitted to stockholders and the effects of retiring stock i SEC requires corporations to disclose their financial affairs through quarterly and annual reports h Additional Taxes Must pay federal and state income taxes as a separate legal entity and some pay taxes on cash dividends double taxation 3 Forming a Corporation a File an application with secretary of state that lists name and purpose of proposed organization amount kinds and number of shares of capital stock to be authorized names of incorporators and shares of stock to which each has subscribed b Get a charter which creates the corporation c Develop by laws that establish the internal rules and procedures for conducting the affairs of the corporation and indicate the powers of stockholders directors and officers d Organization Costs Costs incurred in the formation of the corporation i Legal and state fees and promotional expenditures 4 Ownership Rights rights a Common Stock When the corporation only has one class of stock and owners have following i Vote in election of B O D ii Share corporate earnings through dividends iii Keep same of ownership when new shares of stocks are issued preemptive right iv Share in assets upon liquidation in proportion to their holdings residual claim b Stock Certificate Proof of stock ownership as evidenced by a form that shows the name of the corporation the stockholder s name the class and special features of the stock the number of shares owned and the signatures of authorized corporate officials 5 Stock Issue Considerations a Authorized Stock The total amount of stock that a corporation s charter authorizes it to sell The number of authorized shares is usually reported in stockholder s equity section and exceeds the amount that are issued i Issued Shares Total amount of stock that has been issued to shareholders ii Outstanding Shares Issued Shares Treasury Stock 1 Dividends are only paid on outstanding stock b Common stock can be issued directly to investors or indirectly through an investment banking firm i Indirect Issue Investment banker buys stock from the corporation at a stipulated price and resells the shares to investors Investment firm assumes the risk of selling the shares in return for an underwriting fee c To Set The Price For Publically held companies the interaction between buys sellers determines the price per share i Determine the company s anticipated future earnings ii Its expected dividend rate per share iii Current financial position iv Current state of the economy v Current state of securities market d Market Value of Stock Prices set by the marketplace tend to follow the trend of a company s earnings and dividends Amount that each share of stock will sell for in the market i Factors beyond a company s control might cause day to day fluctuations in market prices e Par No Par Value Stocks i Par Value An Arbitrary amount assigned to each share of stock when it is authorized ii No Par Value Stock Capital stock to which the charter has not assigned a value very common today 1 Board of directors assigns a state value to no par shares 6 Corporate Capital aka stockholder s equity shareholder s equity a Equity section of balance sheet contains two parts i Paid in contributed capital Total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock 1 Normal credit balance 2 Associated Accounts Common Stock Preferred stock ii Retained earnings earned capital Net income that a corporation retains for future use retained earnings 1 Corporations can make distributions of earnings declare dividends out of 2 The net income in Delta Robotics in its first year of operations is 130 000 a Income Summary 130 000 Retained Earnings 130 000 7 Issuing Par Value Common Stock for Cash a Cash proceeds from issuing par value stock may be equal to greater than or less than par value b Hydro Slide Inc issues 1 000 shares of 1 par value common stock at par for cash c Hydro Slides issues an additional 1 000 shares of the 1 par value common stock for cash at 5 i Cash 1 000 Common Stock 1 000 per share i Cash 5 000 Common Stock
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