Page 184 - Encyclopedia of Business and Finance

eobf_C 7/5/06 2:57 PM Page 161

Corporations

CORPORATIONS
Example of stock split
A business corporation is a legal entity permitted by law
in every state to exist for the purpose of engaging in law-
Value of
ful activities of a business nature. It is an artificial person shareholder's shares
created by law, with many of the same rights and respon- 2 for 1 on corporation's records
stock Shareholder
sibilities possessed by humans. Corporations are widely split owns Per share Total value
prevalent in the United States and virtually every large Before 100 shares $80 $8,000
enterprise is a corporation. After 200 shares $40 $8,000

RIGHTS AND PRIVILEGES OF A
Figure 1
CORPORATION
Within legal guidelines, corporations may issue stock,
declare dividends, and provide owners with limited liabil-
ity. Recipients of cash dividends pay income tax as of the
year the dividends are received. Income tax on stock divi-
Stocks A corporation can issue and attempt to sell stock. dends, however, is postponed until the recipients sell the
Every share of stock owned represents a share of the cor- stock.
poration’s ownership.
Occasionally, corporations split their stock. However,
From the standpoint of stock sale, there are two kinds this does not change the value of the shareholder’s shares
of corporations: public and private. With a public corpo- on the corporation records or the corporation’s net worth.
ration, anyone can buy shares of stock, which may very A stock split is a good sign as it is often done to reduce the
well be traded on a stock exchange. With a private corpo- price of a stock that has risen to a point at which its mar-
ration, however, sale of stock may be limited to stipulated ketability is impaired. (See Figure 1)
persons, such as members of the principal stockholder’s
family.
Limited Liability. If a corporation suffers large financial
A corporation can own “treasury stock”; that is, it losses or even terminates its existence, the shareholders
may repurchase its own stock that it had previously issued might lose part or all of their total investment. However,
and sold. that is ordinarily the extent of their loss. Creditors cannot
A corporation may even give its stock away for any satisfy their claims by looking to the personal assets of cor-
reason; for example, as a donation to a charity, or as a porate shareholders as they can with a sole proprietorship
reward to employees for industrious service. or an ordinary partnership.
Limited liability can be advantageous because it
Dividends. A corporate board of directors has the author- encourages investment in the corporation. With personal
ity to declare and pay dividends in the form of cash or assets of $1.1 million, a potential investor might willingly
stock. Cash dividends are ordinarily payable from current invest $50,000 in a corporation knowing that no risks
net income, although net income “kept” from previous exist beyond the $50,000.
years may also be used. A common name for net income The limited liability advantage, however, can be lost
kept is “retained earnings.” Recipients of stock dividends
if the owners directly engage in the company’s manage-
receive shares of stock in the corporation, thereby increas-
ment and play an influential role in causing corporate
ing the total number of shares they own. Stock dividends
losses.
are declared from capital stock that has been authorized
but not issued.
Additional Rights of a Corporation. Corporations have
Rules exist regarding eligibility for receipt of a divi- the basic right to conduct a business in which they sell
dend. For example, assume that a cash dividend is products or services and to engage in either a profit-
declared on August 15, payable on September 15. If seeking or a non-profit-seeking enterprise.
Stockholder A owns the stock on August 15, he or she
Corporations have the right to own, sell, rent, or lease
receives the dividend on September 15. If Stockholder A
real or personal property.
sells the stock on August 27, Purchaser B buys it “ex-
rights,” meaning that on September 15 the dividend still Corporations may sue other business entities, such as
goes to Stockholder A. Purchaser B would not receive a another corporation, a partnership, or a sole proprietor-
dividend until the next one is declared, perhaps on ship.
November 15. Corporations may merge with other corporations.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 161