Stockholders’ Equity
Chapter 9
Ch. 9.1: Forming a
Corporation
Objectives
Explain the advantages
and disadvantages of a
corporation.
Understand how a
corporation is
organized.
Describe how a
corporation is managed.
Why do private companies
choose to incorporate?
A Corporation Defined
“An artificial being, invisible,
intangible, and existing only in
contemplation of the law.”
John Marshall, Chief Justice of the US Supreme Court (1819)
Identify several advantages of a
corporation?
Identify several disadvantages
of a corporation?
Incorporating a Business
Application must be submitted to corporation
commissioner (articles of incorporation).
What information do you think is
included on the articles of incorporation?
Articles of incorporation —> CHARTER
Incorporating a Business
Stock Subscribers Meeting —> elects board of
directors —> Bylaws developed, officers
appointed
Bylaws and Charter - govern, provide basic
rules for operating the corporation.
Organizational Costs
Accountant
Fees paid to state,
attorney’s fees, promotional
costs, travel expenses,
charges for printing stock
certificates, etc.
Costs —> debited to
Organizational Costs
(intangible asset account)
Stock Certificates
Proof of ownership in a
corporation.
Transferable
Management of a
Corporation
Stockholders are the owners
Delegates authority to the board of directors
Often stockholders
Board of directors delegates authority to the
officers, runs company
Stockholders’ Equity
Ownership equity in a corporation
Represents the value of the owner’s claim to the
assets
Capital stock accounts summarize owners’
investments.
Retained Earnings, summarizes earnings held by
the corporation (not distributed as dividends)
Preemptive Right
Additional shares of stock issued.
Current stockholders have right to purchase
addition shares in proportion to their ownership
of the corporation.
Ex: Spectrum issued 10,000 shares originally.
John owns 2,000 shares or one-fifth. If Spectrum
decides to issue 1,000 additional shares, John has
rights to 200 of the shares (1,000 x 1/5).
In your own words explain the
relationship between common
stock, par value, and no-par stock?