FORMS OF BUSINESS ORGANIZATIONS
LEGAL FORMS OF BUSINESS ORGANIZATION
SOLE PROPRIETORSHIP
ONE OWNER
PARTNERSHIPS
CORPORATIONS
> ONE OWNER
Can a
partnership
have 500
owners?
Can a
corporation
have one
owner?
Does every business
have a choice of legal
form?
Stockholders’ Equity
• Corporate legal form
– Advantages and disadvantages
• Shareholder rights
• Forming a corporation
• Components of stockholders equity
– Common stock
– Treasury stock
– Preferred stock
• Dividends
• Stock dividends and stock splits
WHY LARGE BUSINESSES USE THE CORPORATE FORM
CORPORATONS
Advantages
Limited Liability
Transferability
Ability to Raise Capital
Disadvantages
Double Taxation
Shareholder rights
• Share in dividends, if any
• Share in liquidation…what’s left over
• Preemptive right
Shareholder rights
• Elect board of directors
– Make strategic decisions
• Outside versus inside
– M ajority voting: one vote per share. 51% elects all.
– Cumulative voting: number of directors elected x shares
= number of votes. Can vote all for one candidate
– Stagger number of directors up for election
• “Figure heads”
– Hires management to implement strategic
decisions
Forming a corporation
• Select state of incorporation
– Any state
• Organization costs
– Attorney fees, filing fees, etc.
– Amortized over five years
• Amortization expense
•
Organization costs
Components of stockholders equity
• Capital stock
– Authorized shares: number of shares
company can issue
• Generally a very large number
– Issued: transferred to shareholders
• IPOs: initial offering of stock to public
– Expensive: fees of 6.6% of capital raised, for example
– Pricing
– Outstanding: still owned by shareholders
Components of stockholders equity
• Treasury stock
– Stock issued but then repurchased
• Mature or fast growing company???
• Impact on earnings per share
• Impact on market price
– Alternative to dividends
– Tax treatment
Components of stockholders equity
• Treasury stock
– Purchase
• Treasury stock (negative owners’ equity)
•
Cash
– Sale (at “gain”…)
• Cash
•
Treasury stock
•
Paid in capital
Components of stockholders equity
• Preferred stock
– Preference as to dividends
• Cumulative versus noncumulative
– Dividends in arrears
– Preference in liquidation
• Receive par value and any unpaid dividends before
any distribution to common stockholders
• Relationship to creditors
Payment of dividends
• Date of declaration (by board of directors)
– Retained earnings
–
Dividends payable (now have liability)
• Date of record (ex-dividend date)
– Own stock on this date, get dividend
– No entry required
– Impact on stock price when stock goes ex-dividend
• Date of payment
– Dividends payable
–
Cash
Stock dividends
• Additional shares distributed to
shareholders
• Impact on stock price of a 10% stock
dividend
– Steak-N-Shake
• Not taxable income
• Investor still owns same percent of
company
Stock dividend
• Entries
– When stock dividend declared
• Retained earnings (FMV of stock)
•
Common stock distributable (par value)
•
Paid in capital
(excess)
– When stock is distributed
• Common stock distributable
•
Common stock
Stock splits
• Additional shares distributed to
shareholders. 2 for 1 stock split
– Impact on stock price of a 2 for 1 split
• Signaling theory
• Not taxable income
• Investor still owns same percent of
company
• No journal entry required