Oct 16 - ORIE 3150 Chapter 9, Sources of Capital, Owners...

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ORIE 3150 October 16, 2008 Chapter 9, Sources of Capital, Owner’s Equity A. A corporation is a business organization authorized by the state and considered a separate legal entity from its owners. B. There are several advantages to the corporate form of business. 1. Separate legal entity. A corporation can be sued in court, etc. 2. Limited liability of owners. Stockholder’s can lose their entire investment, but nothing more. 3. Ease of capital generation. A corporation can sell more stock. 4. Ease of transfer of ownership. Sell stock to others. 5. Continuous existence. A corporation does not cease to exist when the founder retires. 6. Established case law. The laws regarding corporations are reasonable well- established in the USA. C. Disadvantages. 1. Governmental regulation. 2. Double taxation. Say you own a corporation. The corporation’s net income is taxed. If you pay yourself a dividend, it is taxed. The dividends you receive as a private individual are taxed again. That is why some business owner’s eschew the traditional corporate form and use an S- corporation, partnership, or LLC business form. 3. Limited liability of owners. Example: A bunch of rich people own a corporation. The corporation has limited assets, and owes money to a bank. In the case of a bankruptcy, the bank can only claim the assets of the corporation. The bank cannot claim the assets of the rich people themselves. 4. Separation of ownership and control. Occasionally, management does not act in the best interest of its owners (stockholders). Example: a corporation owns a fleet of jet planes for use by management. This is why many corporations compensate there upper management with stock, so that upper level managers become (in effect) owners as well. D. Organization costs (an intangible asset) consist of all costs of forming a corporation.
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This note was uploaded on 11/07/2008 for the course ORIE 3150 taught by Professor Callister during the Summer '08 term at Cornell University (Engineering School).

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Oct 16 - ORIE 3150 Chapter 9, Sources of Capital, Owners...

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