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CORPORATIONS: ORGANIZATION AND SHARE CAPITAL TRANSACTIONS

CHAPTER. 13. CORPORATIONS: ORGANIZATION AND SHARE CAPITAL TRANSACTIONS People who bring their textbook on the final exam date, will get one mark as bonus mark!. CORPORATE FORM OF ORGANIZATION. A corporation is a legal entity created by law that is separate and distinct from its owners

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CORPORATIONS: ORGANIZATION AND SHARE CAPITAL TRANSACTIONS

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  1. CHAPTER 13 CORPORATIONS: ORGANIZATION AND SHARE CAPITAL TRANSACTIONS People who bring their textbook on the final exam date, will get one mark as bonus mark!

  2. CORPORATE FORM OF ORGANIZATION • A corporation is a legal entity created by law that is separate and distinct from its owners • Like any citizen, it also has the obligation to respect laws and pay income tax.

  3. CLASSIFICATION OF CORPORATIONS • A corporation’s purpose may be to earn a profit, or it may be organized as non-for profit. Corporation vs. Non-for-profit organization • Classification by ownership distinguishes between publicly-held corporations and privately-held corporations.

  4. CLASSIFICATION OF CORPORATIONS • Public Corporation – stocks (or shares) are traded in public stock exchange such as TSX and Dow Jones. For example, Dollarama, Coke, Apple • Private Corporation – Stocks are held by private individuals. For example, Enterprise rent a car, many small businesses • Crown Corporation – owned by the government. For example, Go Transit, LCBO, Ontario Hydro etc

  5. CHARACTERISTICS of corporation • Separate legal existence • Limited liability of shareholders • Transferable ownership rights • Ability to acquire capital (raise money by issuing more shares) • Continuous life (even if the shareholders die, the corporation will continue)

  6. CHARACTERISTICS of corporation • Corporation management – CEOs and managers are specialists who will manage the company. Whereas small business => owners = managers • Additional taxes – must pay corporate income tax. Share holders also pay personal income tax  Double taxation

  7. ILLUSTRATION14-1ADVANTAGES AND DISADVANTAGES OF A CORPORATION AdvantagesDisadvantages Corporate management - professional managers Separate legal existence Limited liability of shareholders Deferred or reduced income taxes Transferable ownership rights Ability to acquire capital Continuous life Corporation management - ownership separated from management Increased costs and complexity to adhere to government regulation Potential for additional income taxes

  8. ORGANIZATION COSTS • Costs incurred in forming a corporation are called organization costs. • These costs include fees to underwriters, legal fees, incorporation fees, and promotional expenditures. • Organization costs are normally expensed in the year the organization cost is incurred.

  9. SHAREHOLDER RIGHTS • To raise capital, the corporation sells shares • If only one class of shares-common shares • Ownership rights specified in articles of incorporation or by-laws • Voting…owners

  10. SHARE TERMINOLOGY • Authorized shares – maximum amount of shares a corporation is allowed to sell as authorized by corporate charter • Issued shares – number of shares sold in the market

  11. STOCK MARKET PRICE • Shares of publicly held companies are traded on organized exchanges at dollar prices per share established by the interaction between buyers and sellers

  12. CORPORATE CAPITAL • Shareholders’ equity (owner’s equity) • The shareholders’ equity section of a corporation’s balance sheet consists of: • Contributed capital • Share capital • Additional contributed capital • Retained earnings

  13. ILLUSTRATION 14-6SHAREHOLDERS’ EQUITY SECTION Shareholders’ equity Contributed capital Common shares, 100,000 no par value shares authorized, 50,000 issued Retained earnings Total shareholders’ equity $800,000 130,000 $930,000

  14. REACQUIRED SHARES • Reacquired shares are a corporation’s own shares that have been issued, fully paid for, and then reacquired by the corporation. • Reacquired shares are generally retired and cancelled. • In certain restricted circumstances, these shares are not retired, but are held as treasury shares for later reissue. • Outstanding shares are shares which are still owned by shareholders.

  15. REACQUISITION OF SHARES • Why would a company choose to reacquire its shares? • Reduce quantity/raise share price • Increase EPS • If authorized share limit reached, may need additional shares for use in bonus or compensation plans or acquisitions

  16. PREFERRED SHARES • Preferred shareshave priority over common shares with regards to: 1.Dividendsand 2.Assets in the event of liquidation • Preferred shareholders usually do not have voting rights • Preferred shares are shown first in the share capital section of shareholders' equity

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