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Spiceland Chpt 10 Assigned Homework Solutions

Spiceland Chpt 10 Assigned Homework Solutions - Chapter 10...

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Chapter 10 Homework Solutions – Spiceland Question 10-5 A corporation offers three primary advantages over sole-proprietorships and partnerships. These are (1) limited liability, (2) ability to raise capital, and (3) lack of mutual agency. Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. Because corporations sell ownership interest in the form of shares of stock, ownership rights are easily transferred. An investor can sell his or her ownership interest (shares of stock) at any time and without affecting the structure of the corporation or its operations. Finally, a lack of mutual agency means that individual shareholders cannot legally bind the corporation to a contract. A corporation has two primary disadvantages relative to sole-proprietorships and partnerships. These are (1) additional taxes and (2) more paperwork. Corporations have double taxation. Corporate income is taxed once on earnings at the corporate level and again on dividends at the individual level. Corporations also have more paperwork as federal and state governments impose expensive reporting requirements on the company. Question 10-6 An LLC or an S Corporation allows a company to enjoy limited liability as a corporation, but avoid the double taxation of traditional corporations. Question 10-7 Authorized stock is the total number of shares available to sell, stated in the company’s articles of incorporation. Issued stock is the number of shares that have been sold to investors. A company usually does not issue all its authorized stock. Outstanding stock is the number of shares held by investors. Issued and outstanding are the same amounts as long as the
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