ACCTG 2-part 1.docx - CH13 C1: IDENTIFY CHARACTERISTICS OF...

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CH13 C1: IDENTIFY CHARACTERISTICS OF CORPORATIONSAND THEIR ORGANIZATION.Organization of Corporations:A corporation is an entity that is separate from its owners. The owners, who arecalled stockholders or shareholders, are issued stock certificates to evidencetheir ownership interests.Corporations are separated into two types. A privately (or closely) heldcorporation has not offered its stock for sale to the public and, as a result,usually has only a few stockholders. A publicly held corporation offers its stockfor public sale and can have thousands of stockholders. Public sale refers toselling and trading stock on an organized stock market.Advantages and Disadvantages:Corporations represent an important type of organization. Their uniquecharacteristics offer certain advantages and disadvantages. Let's now take alook at some of the advantages.Separate legal entity means that a corporation conducts its affairs with thesame rights, duties, and responsibilities of a person. It takes actions through itsagents (its officers and managers).Limited liability of stockholders means that stockholders are not liable for eithercorporate acts or corporate debt. As such, if the corporation is not able to pay itsdebts, creditors cannot go after the personal assets of the stockholders.
Transferable ownership rights means that stockholders can sell their stock,which evidences their ownership interests. Although the corporation must keeptrack of its stockholders, the transfer of shares from one stockholder does notgenerate a journal entry for the corporation.Continuous life means that a corporation's life continues indefinitely because itis not tied to the physical lives of its owners.A corporation acts through its agents, who are its officers and managers. Lack ofmutual agency for stockholders means that stockholders, who are not its officersor managers, do not have the power to bind the corporation to contracts.Ease of capital accumulation means that it is relatively easy to raise capital byissuing stock. Buying stock is attractive to investors because (1) stockholdersare not liable for the corporation's acts and debts, (2) stocks usually aretransferred easily, (3) the life of the corporation is unlimited, and (4)stockholders are not corporate agents.Now that we've learned about some of the advantages of corporations, let's takea look at some of the disadvantages. Government regulation means acorporation must meet requirements of a state's incorporation laws, whichsubject the corporation to state regulation and control. Proprietorships andpartnerships avoid many of these regulations and governmental reports.Proprietorships and partnerships are not subject to income taxes. Their incomeis taxed as the personal income of their owners. Corporate taxation means thatcorporate income is subject to federal and state income taxes that might beassessed at 40 percent or more. Double taxation often occurs when a portion ofcorporate income is paid out to the stockholders as dividends. The corporation

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