chapter 11 and 12 study guide

chapter 11 and 12 study guide - CHAPTER 11 Understand the...

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CHAPTER 11 Understand the characteristics of the corporate form of business, including advantages and disadvantages. Corporation : 1. An entity created by law 2. Separate from its owners 3. Has rights and privileges *Ownership of a corporation can be privately or publicly held Advantages of Corporate Characteristics: 1. Separate Legal Entity: Have rights and privileges that individuals have 2. Limited Liability of Stockholders: Stockholders liable to debt only to the extent of their involvement in the corporation 3. Transferable Ownership Rights: You can easily sell stock in stock exchange and get rid of ownership responsibility 4. Continuous Life: Even if shareholders sell stock, the corporation still continues 5. Lack of mutual agency for stockholders: lack of mutual agency – stockholders cannot bind the corporation to contracts; no one stockholders can bind all stocks 6. Ease of capital accumulation: previous advantages enable corporations to accumulate large amounts of capital from combined stockholders investments (people put together resources) Disadvantages of Corporate Characteristics : 1. Government Regulation: Corporation must meet requirements of a state’s incorporation laws which subject them to state regulation and control which proprietorships and partnerships avoid 2. Corporate Taxation: Property/payroll taxes like proprietorships/partnerships but also additional taxes including federal and state income taxes. Double taxation: corporate income is taxes a second time from stockholders personal income (dividends): so corporations pay doubt amount of taxes on same amount of income Corporate Organization and Management -Obtaining a charter from a state government creates a corporation Charter: formal approval for corporation to start operations -After state government issues charter, invite investors to purchase stock -Organization Expenses: the costs to organize a corporation -Ultimate control of a corp. = stockholders: control the corporation by electing board of directors -Stockholders = owners, but not involved in day to day operations of business (company’s employees) -Stockholders have specific rights— 1. Vote at stockholders meetings 2. Sell/dispose of their stock 3. Preemptive right (right to have the first opportunity to purchase their proportional share of any common stock later issued by the corporations-so you don’t lose your % of ownership in corporation)
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4. Receive the same dividend, if any are declared, on each common share of the corp. 5. Share in any assets remaining after creditors are paid when/if the corporation is sold Identify the differences between Authorized, Issued and Outstanding Stock and be able to compute the number of shares Issued and Outstanding, given the total par value. Authorized Stock:
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chapter 11 and 12 study guide - CHAPTER 11 Understand the...

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