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Unformatted text preview: CHAPTER 12 Corporations: Organizing, Stock, Dividends, & Equity CHAPTER REVIEW The Corporate Form of Organization 1. (S.O. 1) A corporation is an entity created by law that is separate and distinct from its owners and its continued existence is dependent upon the corporate statutes of the state in which it is incorporated. 2. The characteristics that distinguish a corporation from proprietorships and partnerships are: a. The corporation has separate legal existence from its owners. b. The stockholders have limited liability. c.Ownership is shown in shares of capital stock, which are transferable units. d. It is relatively easy for a corporation to obtain capital through the issuance of stock. e. The corporation can have a continuous life. f. The management in the corporations organizational structure is at the discretion of the board of directors who are elected by the stockholders. g. The corporation is subject to numerous government regulations. h. The corporation must pay an income tax on its earnings, and the stockholders are required to pay taxes on the dividends they receive: the result is double taxation. Forming a Corporation 3. The formation of a corporation involves (a) filing an application with the Secretary of State, (b) paying an incorporation fee, (c) receiving a charter (articles of incorporation), and (d) developing by-laws. a. Costs incurred in forming a corporation are called organization costs. b. These costs include fees to underwriters, legal fees, state incorporation fees, and promotional expenditures. c.Organization costs are expensed as incurred. Ownership Rights of Stockholders 4. When chartered, the corporation may begin selling ownership rights in the form of shares of stock. Each share of common stock gives the stockholder the following ownership rights: a. To vote for the board of directors and in corporate actions that require stockholder approval. b. To share in corporate earnings through the receipt of dividends. c.To maintain the same percentage ownership when additional shares of common stock are issued (preemptive right). d. To share in assets upon liquidation (residual claim). Stock Issue Considerations 5. Authorized stock is the amount of stock a corporation is allowed to sell as indicated by its charter. a. The authorization of capital stock does not result in a formal accounting entry. b. The difference between the shares of stock authorized and the shares issued is the number of unissued shares that can be issued without amending the charter. 6. A corporation has the choice of issuing common stock directly to investors or indirectly through an investment banking firm (brokerage house). Direct issue is typical in closely held companies, whereas indirect issue is customary for a publicly held corporation....
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This note was uploaded on 01/27/2010 for the course MGT 011A taught by Professor Hancock,john during the Spring '07 term at UC Davis.
- Spring '07