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Corporations: Organization, Stock Transactions, and Dividends

Explore the characteristics of corporations, including legal entity status, stock transactions, dividends, and formation process. Understand the role of stockholders, board of directors, officers, and employees. Learn about the advantages and disadvantages of forming a corporation, including limited liability and double taxation. Discover the steps involved in incorporating a business and the costs associated with the process.

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Corporations: Organization, Stock Transactions, and Dividends

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  1. Corporations: Organization, Stock Transactions, and Dividends LO 1 – Understanding the Nature of a Corporation

  2. LO 1 Characteristics of a Corporation • A corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name. • A corporation sells shares of ownership, called stock.

  3. LO 1 Characteristics of a Corporation • The stockholdersor shareholders who own the stock own the corporation. They can buy and sell stock without affecting the corporation’s operations or continued existence. • Corporations whose shares of stock are traded in public markets are called publiccorporations.

  4. LO 1 Characteristics of a Corporation • Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or private corporations. The stockholders of all corporations have limited liability.

  5. LO 1 Characteristics of a Corporation • The stockholders control a corporation by electing a board of directors. This board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers.

  6. LO 1 Characteristics of a Corporation Stockholders Board of Directors Officers Employees

  7. LO 1 Characteristics of a Corporation • A corporation has separate legal existence from its owners. • A corporation has transferable units of ownership. • A corporation has limited stockholders’ liability. • A corporation is subject to taxes. Thus, the corporate form has the disadvantage of double taxation.

  8. LO 1 Characteristics of a Corporation (continued)

  9. LO 1 Characteristics of a Corporation

  10. LO 1 Forming a Corporation • The first step in forming a corporation is to file an application of incorporation with the state. • Because state laws differ, corporations often organize in states with more favorable laws. • More than half of the largest companies are incorporated in Delaware. (See Exhibit 3, next slide.)

  11. LO 1 Forming a Corporation

  12. LO 1 Forming a Corporation • After the application is approved, the state grants a charter, or articles of incorporation, which formally creates the corporation. • Management and the board of directors then prepare bylaws, which are operating rules and procedures for conducting the corporation’s affairs.

  13. LO 1 Forming a Corporation • Costs may be incurred in organizing a corporation, such as legal fees, taxes, license fees, and promotional costs. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below:

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