WEEK 6
CHAPTER 12 - CORPORATIONS: ORGANISATION, SHARE TRANSACTIONS AND
EQUITY
12.1 - The corporate form of organisation
Corporation = an entry separate and distinct from its owners
● Created by law, its existence depends upon status of jurisdiction in
which it is incorporated
1 ● Has most rights and privileges of a person (except ones a living person
can exercise e.g. vote)
● Same responsibilities as a person e.g. abide by laws, pay taxes
Classifying corporations
. By purpose
○ For-profit e.g. Hyundai motors, Microsoft
○ Not-for-profit (charitable, medical, educational purposes) e.g.
International Committee of the Red Cross
2 . By ownership
○ Publicly held corporation -> may have thousands of shareholders -
shares regularly traded on a national securities exchange (e.g.
Toyota, Siemens)
1 ○ Privately held corporation -> only a few shareholders - doesn’t offer
its shares for sale to general public - usually smaller than public held
(exceptions exist e.g. Cargill Inc.)
Characteristics of corporations:
. Separate legal existence
○ Corporate entity is separate from its owner -> acts under its own
name not of its shareholders
○ May buy, own, sell property / borrow money / enter legally binding
contracts under its own name / sue or be used / pay its own taxes
○ Shareholders’ acts do not bind the corporation (unless owners are
agents of the corporation)
◆ e.g. if you owned shares of Volvo, you cant purchase inventory for
company
◆ In constrast: in a partnership, acts of owners bind the
,2 ◆
partnership
. Limited liability of shareholders
○ Liability of shareholders limited to their investment in corporation
(even during bankruptcy)
○ Creditors have no legal claim on personal assets of owners unless
fraud has occurred
. Transferable ownership rights
○ Shareholders can dispose part or all their interest in a corporation by
selling their shares
○ Transfer of shares is entirely at the discretion of the shareholders
(doesn’t require approval of either corporation or other shareholders)
◆ In contrast: in a partnership, it requires the consent of each
owner
○ Normally has no effect on daily operating activities of corporation or
on assets, liabilities, equity
. Ability to acquire capital
○ Relatively easy for corporation to obtain capital through issuance of
shares (virtually unlimited)
○ Investors buy shares in corporation to earn money over time as the
share price grows
○ Invest in shares because of limited liability and readily transferable
(individuals can also become shareholders by investing relatively
small amounts of money)
. Continuous life
○ Corporation life may be perpetual or limited to a specific number of
years
◆ If limited: company can extend life through renewal of charter
○ Continuance of life of corporation not affected by withdrawal, death
or incapacity of shareholder, employee, officer (separate legal
entities)
. Corporations management
○ Shareholders legally own the corporation - They manage it indirectly
trough a board of directors they elect
◆ The board: formulates the operating policies for company +
selects officers e.g. president, vice presidents, to executer policy
and perform daily management functions
○ CEO has overall responsibility for managing the business + delegates
responsibilities to other officers
, ○ Chief accounting officer is the controller:
◆ Maintain the accounting records
◆ Ensures an adequate system of internal control
◆ Prepares financial statements, tax returns and internal reports
○ Treasurer = has custody of the corporation’s financial resources and
is responsible for painting the company’s cash position
○
. Government regulations
○ Protect the owners of the corporation
○ Laws prescribe the requirements for issuing shares, distributions of
earnings permitted to shareholders, effects of retiring shares
○ Securities laws govern the sale of shares to the general public
○ Most publicly held corporations are required to make extensive
disclosure of their financial agars to securities regulations through
quarterly and annual reports
. Additional taxes
○ Owners report their share of earnings on their personal income tax
returns -> then pays taxes on this amount
○ Corporations also have to pay government taxes as a separate legal
entity (can be substantial)
○ Shareholders must also pay taxes on cash dividends
○ -> so many argue that government taxes corporate income twice
(double taxation) - at corporate and individual level
. Other forms of business organisation
○ Combine different attributes of partnerships and corporations
◆ e.g. legal treatment as a corporation but tax treatment as a
partnership (so no double taxation)
CHAPTER 12 - CORPORATIONS: ORGANISATION, SHARE TRANSACTIONS AND
EQUITY
12.1 - The corporate form of organisation
Corporation = an entry separate and distinct from its owners
● Created by law, its existence depends upon status of jurisdiction in
which it is incorporated
1 ● Has most rights and privileges of a person (except ones a living person
can exercise e.g. vote)
● Same responsibilities as a person e.g. abide by laws, pay taxes
Classifying corporations
. By purpose
○ For-profit e.g. Hyundai motors, Microsoft
○ Not-for-profit (charitable, medical, educational purposes) e.g.
International Committee of the Red Cross
2 . By ownership
○ Publicly held corporation -> may have thousands of shareholders -
shares regularly traded on a national securities exchange (e.g.
Toyota, Siemens)
1 ○ Privately held corporation -> only a few shareholders - doesn’t offer
its shares for sale to general public - usually smaller than public held
(exceptions exist e.g. Cargill Inc.)
Characteristics of corporations:
. Separate legal existence
○ Corporate entity is separate from its owner -> acts under its own
name not of its shareholders
○ May buy, own, sell property / borrow money / enter legally binding
contracts under its own name / sue or be used / pay its own taxes
○ Shareholders’ acts do not bind the corporation (unless owners are
agents of the corporation)
◆ e.g. if you owned shares of Volvo, you cant purchase inventory for
company
◆ In constrast: in a partnership, acts of owners bind the
,2 ◆
partnership
. Limited liability of shareholders
○ Liability of shareholders limited to their investment in corporation
(even during bankruptcy)
○ Creditors have no legal claim on personal assets of owners unless
fraud has occurred
. Transferable ownership rights
○ Shareholders can dispose part or all their interest in a corporation by
selling their shares
○ Transfer of shares is entirely at the discretion of the shareholders
(doesn’t require approval of either corporation or other shareholders)
◆ In contrast: in a partnership, it requires the consent of each
owner
○ Normally has no effect on daily operating activities of corporation or
on assets, liabilities, equity
. Ability to acquire capital
○ Relatively easy for corporation to obtain capital through issuance of
shares (virtually unlimited)
○ Investors buy shares in corporation to earn money over time as the
share price grows
○ Invest in shares because of limited liability and readily transferable
(individuals can also become shareholders by investing relatively
small amounts of money)
. Continuous life
○ Corporation life may be perpetual or limited to a specific number of
years
◆ If limited: company can extend life through renewal of charter
○ Continuance of life of corporation not affected by withdrawal, death
or incapacity of shareholder, employee, officer (separate legal
entities)
. Corporations management
○ Shareholders legally own the corporation - They manage it indirectly
trough a board of directors they elect
◆ The board: formulates the operating policies for company +
selects officers e.g. president, vice presidents, to executer policy
and perform daily management functions
○ CEO has overall responsibility for managing the business + delegates
responsibilities to other officers
, ○ Chief accounting officer is the controller:
◆ Maintain the accounting records
◆ Ensures an adequate system of internal control
◆ Prepares financial statements, tax returns and internal reports
○ Treasurer = has custody of the corporation’s financial resources and
is responsible for painting the company’s cash position
○
. Government regulations
○ Protect the owners of the corporation
○ Laws prescribe the requirements for issuing shares, distributions of
earnings permitted to shareholders, effects of retiring shares
○ Securities laws govern the sale of shares to the general public
○ Most publicly held corporations are required to make extensive
disclosure of their financial agars to securities regulations through
quarterly and annual reports
. Additional taxes
○ Owners report their share of earnings on their personal income tax
returns -> then pays taxes on this amount
○ Corporations also have to pay government taxes as a separate legal
entity (can be substantial)
○ Shareholders must also pay taxes on cash dividends
○ -> so many argue that government taxes corporate income twice
(double taxation) - at corporate and individual level
. Other forms of business organisation
○ Combine different attributes of partnerships and corporations
◆ e.g. legal treatment as a corporation but tax treatment as a
partnership (so no double taxation)
