LESSON 11 - 1 LESSON 11 The Major Characteristics of a...

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LESSON 11 The Major Characteristics of a Corporation A Corporation is a legal entity created by law that has most of the rights and privileges of a person. Corporations are classified as “for profit” or “nonprofit,” and Corporations are also classified as either “publicly” or “privately owned.” Publicly Held Corporations may have thousands of stockholders, and its stock is regularly traded on national securities markets, such as the New York Stock Exchange (NYSE). Privately Held Corporations usually have only a few stockholders and do not offer their stock for sale to general public. Whenever a company first incorporates, a brokerage firm prepares and manages the first public offering of the shares of a corporation’s stock. This first offering of shares for sale to the general public is called the Initial Public Offering (IPO). Thereafter, whenever that corporation offers to sell more shares of its stock to the general public, these subsequent stock offerings are called Seasoned Offerings . IPO’s and Seasoned Offerings increase a corporation’s equity and assets to the extent that investors buy its stock, but the buying and selling (transfer) of ownership that occurs after the IPO/Seasoned Offerings has no effect on the corporation’s assets or stockholders' equity. The major characteristics of a Corporation include the following: Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management Government regulations Additional taxes These characteristics are explained in the following paragraphs. Having a separate legal existence means that corporations are separate and distinct from their owners. Corporations may act under their own name, and may buy, own, or sell property, borrow money, and enter into legally binding contracts. Corporations may sue another entity, or a corporation may be sued. A corporation pays its own taxes. The owners of a corporation are the corporation’s stockholders who have purchased common stock shares of the corporation. Although the stockholders can vote on corporate decisions, they cannot bind the corporation to a legally binding covenant, unless owners are agents of the corporation. 1
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The Stockholders are not held responsible for the actions of the corporations that they own, or in other words, the stockholders have Limited Liability . The corporation’s creditors have recourse only to corporate assets to satisfy their claims. The creditors can not claim the owner’s assets in the event that the corporation defaults on its debts to its creditors. Thus, the Liability of stockholders is limited to their investment in their corporation, that is, the corporation’s stock that the owners have purchased. The corporation’s Creditors have no legal claim to the stockholders’ personal assets. Stockholders’ losses are limited to the amount they have invested in the corporation’s
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This note was uploaded on 07/16/2010 for the course ACCT 2302 taught by Professor Dr.winking during the Spring '10 term at Tulane.

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LESSON 11 - 1 LESSON 11 The Major Characteristics of a...

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