Corporations
| Author | G. Maxwell |
| Pages | 161-164 |
Page 161
A business corporation is a legal entity permitted by law in every state to exist for the purpose of engaging in lawful activities of a business nature. It is an artificial person created by law, with many of the same rights and responsibilities possessed by humans. Corporations are widely prevalent in the United States and virtually every large enterprise is a corporation.
Within legal guidelines, corporations may issue stock, declare dividends, and provide owners with limited liability.
A corporation can issue and attempt to sell stock. Every share of stock owned represents a share of the corporation's ownership.
From the standpoint of stock sale, there are two kinds of corporations: public and private. With a public corporation, anyone can buy shares of stock, which may very well be traded on a stock exchange. With a private corporation, however, sale of stock may be limited to stipulated persons, such as members of the principal stockholder's family.
A corporation can own "treasury stock"; that is, it may repurchase its own stock that it had previously issued and sold.
A corporation may even give its stock away for any reason; for example, as a donation to a charity, or as a reward to employees for industrious service.
A corporate board of directors has the authority to declare and pay dividends in the form of cash or stock. Cash dividends are ordinarily payable from current net income, although net income "kept" from previous years may also be used. A common name for net income kept is "retained earnings." Recipients of stock dividends receive shares of stock in the corporation, thereby increasing the total number of shares they own. Stock dividends are declared from capital stock that has been authorized but not issued.
Rules exist regarding eligibility for receipt of a dividend. For example, assume that a cash dividend is declared on August 15, payable on September 15. If Stockholder A owns the stock on August 15, he or she receives the dividend on September 15. If Stockholder A sells the stock on August 27, Purchaser B buys it "exrights," meaning that on September 15 the dividend still goes to Stockholder A. Purchaser B would not receive a dividend until the next one is declared, perhaps on November 15.
Figure 1
Example of stock split
| Example of stock split | |||
| 2 for 1 stock split | Shareholder owns | Value of shareholder's shares on corporation's records | |
| Per share | Total value | ||
| Before | 100 shares | $80 | $8,000 |
| After | 200 shares | $40 | $8,000 |
Recipients of cash dividends pay income tax as of the year the dividends are received. Income tax on stock dividends, however, is postponed until the recipients sell the stock.
Occasionally, corporations split their stock. However, this does not change the value of the shareholder's shares on the corporation records or the corporation's net worth. A stock split is a good sign as it is often done to reduce the price of a stock that has risen to a point at which its marketability is impaired. (See Figure 1)
If a corporation suffers large financial losses or even terminates its existence, the shareholders might lose part or all of their total investment. However, that is ordinarily the extent of their loss. Creditors cannot satisfy their claims by looking to the personal assets of corporate shareholders as they can with a sole proprietorship or an ordinary partnership.
Limited liability can be advantageous because it encourages investment in the corporation. With personal assets of $1.1 million, a potential investor might willingly invest $50,000 in a corporation knowing that no risks exist beyond the $50,000.
The limited liability advantage, however, can be lost if the owners directly engage in the company's management and play an influential role in causing corporate losses.
Corporations have the basic right to conduct a business in which they sell products or services and to engage in either a profitseeking or a...
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