Chapter 11 Reporting and Analyzing Stockholders' Equity
The Corporate Form of Organization
A corporation is created by law. As a legal entity, a
has most of the rights and privileges of a person. The major
exceptions relate to privileges that can be exercised only by a living person, such as the right to vote or to hold public office.
Similarly, a corporation is subject to the same duties and responsibilities as a person. For example,
it must abide by the law and it
must pay taxes
classify corporations in a variety of ways. Two common classifications are
corporation may be organized for the purpose of making a profit or it may be a nonprofit charitable, medical, or educational
Classification by ownership differentiates publicly held and privately held corporations. A
publicly held corporation
thousands of stockholders, and its stock is traded on a national securities market such as the New York Stock Exchange.
privately held corporation
, often referred to as a closely held corporation, usually has only a few stockholders and does
not offer its stock for sale to the general public. Privately held companies are generally much smaller than publicly held
companies, although some notable exceptions exist.
Characteristics of a Corporation
Separate Legal Existence
As an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its
stockholders. Nike, for example, may buy, own, and sell property, borrow money, and enter into legally binding contracts in its
own name. It may also sue or be sued. It pays taxes as a separate entity.
In contrast to a partnership, in which the acts of the
owners (partners) bind the partnership, the acts of the owners (stockholders) do not bind the corporation unless such owners are
agents of the corporation. For example, if you owned shares of Nike stock, you would not have the right to purchase inventory
for the company unless you were designated as an agent of the corporation.
Limited Liability of Stockholders
Since a corporation is a separate legal entity, creditors ordinarily have recourse only to corporate assets to satisfy their claims.
The liability of stockholders is normally limited to their investment in the corporation. Creditors have no legal claim on the
personal assets of the stockholders unless fraud has occurred. Thus, even in the event of bankruptcy of the corporation,
stockholders' losses are generally limited to the amount of capital they have invested in the corporation.
Transferable Ownership Rights
Ownership of a corporation is held in shares of capital stock, which are transferable units. Stockholders may dispose of part or all
of their interest in a corporation simply by selling their stock. The transfer of an ownership interest in a partnership requires the
consent of each partner. In contrast, the
transfer of stock is entirely at the discretion of the stockholder. It does not require the