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07 ch 11 - Chapter Eleven Reporting and Analyzing...

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Chapter Eleven – Reporting and Analyzing Stockholders’ Equity (Pages 532-564) I. Corporate Form of Organization a. Classification by ownership i. Publicly held – May have thousands of stockholders, and its stock is regularly traded on a national securities market ii. Privately held (closely held) – Usually has only a few stockholders and does not offer its stock for sale to the general public. Also, it is generally smaller than a publicly held corporation. b. Characteristics i. Separate legal existence – corporation is separate from its shareholders (owners) and can act under its own name ii. Limited liability of stockholders 1. Creditors ordinarily can only go after the corporate assets to satisfy their claims 2. Stockholders are only liable up to their investment in that corporation 3. Creditors have no legal claim on the personal assets of the stockholders unless fraud has occurred iii. Transferable ownership rights – Shareholders can buy and sell shares as they see fit without approval of other shareholders or management iv. Ability to acquire capital – Easy due to small cost of each share v. Continuous life 1. Life is stated in the corporate charter 2. May be limited to a specific number of years or may be perpetual 3. Not affected by death, withdrawal, or incapacity of stockholders, employees, or officers vi. Corporation management 1. Shareholders elect board of directors 2. Board of directors hires executives, who then hire other employees 3. Board of directors also develops the operating policies for the firm vii. Government regulations – subject to many more federal and state regulations than other forms of business organization viii. Additional taxes 1. “Double taxation” 2. Corporation pays taxes on earnings 3. Shareholders pays taxes on dividends paid to them by the corporation c. Formation i. Formed by a grant of a state charter (every corporation is incorporated in only one state, which does NOT have to be the state where the corporation has its headquarters) ii. Upon receipt of its state charter, by-laws are established to lay out the internal rules and procedures for conducting the affairs of the corporation iii. Even though there is only one state charter, a corporation must obtain a license from each state in which it does business d. Stockholder rights i. Provided by the articles of incorporation or the by-laws ii. Stock certificate provides proof of stock ownership
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