Presentation Transcript

1. Corporations

   Chapter 13
2. Corporate form of organization Corporations is a legal entity, its own person Offers protection and separation for owners Same rights and privileges as a person Except cannot vote or hold public office Corporations can be for profit Not for profit
3. Corporate form of organization Cont. Publicly held corporation Usually has many owners or shareholders Shares traded in security market, like TSX Privately held corporation Usually has few shareholders Does not offer shares for public sale Generally much smaller
4. Corporate form of organization Cont. Separate legal existence Separate from owners Can buy, sell and own property Borrow money Enter into legal agreements Limited liability to shareholders Creditors only have access to corporate assets, not owners’ Risk to owner is limited to amount invested
5. Corporate form of organization Cont. Transferable Ownership Rights Owners can sell as they like, no consent from other owners is required as in partnerships Transfer has no affect on activities or accounts Ability to acquire capital By issuing shares, easy for large corporations, more difficult for small
6. Corporate form of organization Cont. Continuous life Because of separate entity from owners, a corporation has no end date or death Corporation Management Managed indirectly through board of directors that are elected The board of directors makes decisions and appoints officers, like president, CEOs, VPs etc Ultimately these high ranking officers are responsible to the board of directors Board of directors are responsible to the shareholders who elected them
7. Corporate form of organization Cont. Government regulations Corporations can be registered federally or provincially There are specific rules such for; issuing shares, distributing income to shareholders, and reacquiring shares
8. Corporate form of organization Cont. Income tax Corporations pay as separate legal entities Is between 13% and 36% Much lower than if earned by an individual Shareholders pay tax when corporate income is received via dividend
9. Corporate form of organization Cont. Forming a corporation Company constitution Name and purpose Amount and kind of share capital to be authorized, and number of shares Names and addresses of the incorporators Location of head office Company by-laws (internal rules) All costs associated with setting up an corporation (accounting, legal etc) are usually expensed during the first year
10. Corporate form of organization Cont. Ownership rights of shareholders Corporations can sell different types of shares (we will discuss this later), all rights and privileges are stated when company incorporates Shareholders have the right to the following, in relation to how many shares they own vs the total number of shares Vote, like appointing board of directors Dividends Liquidation, share in any assets after going out of business
11. Corporate form of organization Cont. Share issue consideration Authorized share capital Authorized shares is the total number of shares the corporation is allowed to sell Most corporations specify an unlimited amount of shares Issued shares are the shares that have been sold Corporation needs to get legislative approval to increase the amount of shares they are able to sell
12. Corporate form of organization Cont. Issue of shares Can issue shares directly to investors or via investment dealer Investment dealer is the most common First time offering of shares by a company to anyone is called initial public offering (IPO) Market value of shares Share price roughly follows income trends Can fluctuate based on how well the corporation is doing External influences like changing interest rates or terrorism can affect market value
13. Corporate form of organization Cont. Legal capital Share capital replaces owner’s capital, cannot be taken out of corporation Retained earnings is net income that is kept for future use, this money can remain in the corporation or distributed to shareholders or a combination of the two
14. Common shares Cash for shares Usually shares are issued for cash Cash is debited and Common Shares is credited Ex. 2500 shares valued at $2
15. Common shares Cont. Shares for services or noncash assets shares can be issued for services or noncash assets The asset or expense is debited and Common Shares is credited Ex. 5000 shares valued at $2
16. Common shares cont. Shares for services or noncash assets with no share market value When shares are issued for services or noncash assets and the value of shares is not known The asset or expense is debited and Common Shares is credited by the amount of the asset contributed or service performed Ex. Equipment worth $50 000
17. Common shares cont. Reacquisition of shares When shares are reacquired the shares are retired and canceled, which makes them authorized but not issued 3 steps must happen to retire shares Remove cost of shares from share capital account Cost of Share = Balance of Common Share / Number of Shares Record cash paid Must pay what market value is Record gain or loss on reacquisition Gain or loss is recorded in shareholder’s equity
18. Common shares cont. Reacquisition Below Average Cost Ex. Balance of common shares of $50 000, 25 000 common shares issued, Average cost $2/share, reacquired 5000 common shares at $1.50
19. Common shares cont. Reacquisition Below Average Cost Debit difference of average cost and market value to from contributed capital, if none available debit retained earnings Ex. Balance of common shares of $50 000, 25 000 common shares issued, Average cost $2/share, reacquired 5000 common shares at $2.50
20. Preferred shares Preferred shares take priority over common shares, but no voting rights Usually they come first for getting paid dividends and getting assets if the company is liquidated Dividend preference dividends are paid out when board of directors decides to Preferred shares get dividends before common shares Cumulative dividend, can still be paid for past years dividends not paid out at end of that business year Noncumulative dividend, cannot be paid for past years dividends not paid out for that business year
21. Preferred shares Cont. Convertible preferred Convertible preferred shares allow the holder to convert from preferred shares to common shares at a certain ratio, like 1:2 for example Ex. Assume that the preferred shares for stock BBB sell for $10 and the common shares sell for $4, with a conversion of 2 common shares for every 1 preferred, then price of common shares goes up to $7
22. Preferred shares cont. Redeemable and retractable preferred Redeemable shares give the corporation the right to buy the shares back from shareholders Redeemable shares are usually convertible Retractable shares are redeemable by the discretion of the shareholder, usually under a set price and date Redeemable and retractable shares usually are listed under liabilities, rather than Shareholder’s equity
23. Preferred shares cont. Liquidation preference Liquidation preference means that if the business fails preferred shareholders will get their money back before common shareholders Creditors will get paid before any shareholder
24. Statement presentation and analysis Share Capital is the first section of the Shareholder’s equity and lists the amount and types of shares Preferred shares come first, and then common Dividends is in place of drawings Retained Earnings is cumulative net income from the corporation’s start that has not been paid out as a dividend Accumulated and comprehensive income is where net income/loss goes, and is closed out to retained earnings at the end of the period
25. Statement presentation and analysis cont.
26. Statement presentation and analysis cont. Return on Equity Shows how much money is earned based on how much is invested Higher is better Return on Equity Net Income Average Shareholders’ Equity