Corporations represent an important type of organization. Their unique characteristics offer advantages and disadvantages.
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Transferable ownership rights: The transfer of shares from one stockholder to another usually has no effect on the corporation or its operations except when this causes a change in the directors who control or manage the corporation. Continuous life: A corporation’s life continues indefinitely because it is not tied to the physical lives of its owners. Lack of mutual agency for stockholders: A corporation acts through its agents, who are its officers and managers. Stockholders, who are not its officers and managers, do not have the power to bind the corporation to contracts — referred to as lack of mutual agency.
Ease of capital accumulation: Buying stock is attractive to investors because (1) stockholders are not liable for the corporation’s acts and debts, (2) stocks usually are transferred easily, (3) the life of the corporation is unlimited, and (4) stockholders are not corporate agents. These advantages enable corporations to accumulate large amounts of capital from the combined investments of many stockholders. Disadvantages of Corporate Characteristics Government regulation: A corporation must meet requirements of a state’s incorporation laws, which subject the corporation to state regulation and control.
Proprietorships and partnerships avoid many of these regulations and governmental reports. Corporate taxation: Corporations are subject to the same property and payroll taxes as proprietorships and partnerships plus additional taxes. The most burdensome of these are federal and state income taxes that together can take 40% or more of corporate pretax income. Moreover, corporate income is usually taxed a second time as part of stockholders’ personal income when they receive cash distributed as dividends. This is called double taxation.
(The usual dividend tax is 15%; however, it is less than 15% for lower income taxpayers, and in some cases zero. ) A corporation is created by obtaining a charter from a state government. A charter application usually must be signed by the prospective stockholders called incorporators or promoters and then filed with the proper state official. When the application process is complete and fees paid, the charter is issued and the corporation is formed. Investors then purchase the corporation’s stock, meet as stockholders, and elect a board of directors.
Directors oversee a corporation’s affairs. Organization Expenses Organization expenses (also called organization costs) are the costs to organize a corporation; they include legal fees, promoters’ fees, and amounts paid to obtain a charter. The corporation records (debits) these costs to an expense account called Organization Expenses. Organization costs are expenses as incurred because it is difficult to determine the amount and timing of their future benefits. Reference: http://classof1
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