easy transfer of ownership

When you see the term stockholders’ equity, you should instantly think of a corporation. That is because corporations are the only type of entity that have stockholders. Partnerships have partners. Sole proprietorships have a proprietor. Corporations have shareholders.

A corporation is an entity structure that offers a number of characteristics that make it unique. Some of these characteristics are advantages and some are disadvantages. The important characteristics of a corporation are:

Separate Entity

When you create a corporation, it is like giving birth to a child. The corporation is a being separate from the owner. It has many of the rights and privileges that a person would have, things like free speech and the ability to establish credit. It is because of this principle that a number of the other characteristics exist.

Unlimited Life and Continuous Existence

Because a corporation is an entity separate from the owner, even if shareholder were to pass away, the corporation still exists. A corporation can continue to exist until it is dissolved, either because the owners agree to do so or because it is forced into bankruptcy and forcibly dissolved.

Easy Transfer of Ownership

If you watch the stock market, you know how easy it is to buy and sell stock. Every time a stock transaction takes place, partial ownership of the company changes hands. Due to the fact that a corporation is a separate entity from its owners, owners can easily dispose of their ownership stake by simply selling their stock. As long as there is a willing buyer, ownership transfers can take place.

Limited Liability for Shareholders

A corporation can establish credit and enter into business transactions with third-parties. Shareholders are not liable for the actions of the corporation unless a shareholder personally guarantees a debt (which is often required when small corporations are establishing credit). Therefore, shareholders have limited liability against personal losses.

If a corporation gets sued, the shareholders cannot be sued with it. If a corporation goes bankrupt, the shareholders cannot be held liable for the debt (unless personally guaranteed). A shareholder’s liability is limited to the amount of the investment made by the shareholder. For example, if you invest $10,000 in a corporation and that corporation does bankrupt, you will most likely lose your $10,000 investment because the stock will become worthless. You cannot lose more than the investment in the company.

Separation of Ownership and Management

Corporations allow for the separation of ownership and management. That means that owners do not need to be managers and managers do not need to be owners. It is often the case that someone is both, like the case of Mark Zuckerberg at Facebook. In most small corporations, the owners typically manage the company but it is not necessary that owners run the company or are even involved in the day-to-day operations of the company.

In some cases, this is considered an advantage, but if you are a shareholder/manager, you could also lose control of the company you started.

Corporate Taxation and Double Taxation

Unlike sole proprietorships and partnerships, corporations pay taxes at the entity level. According to KPMG (one of the Big 4 Accounting Firms), the . This applies to the profit that the corporation makes. If the company decides to pay out dividends to its shareholders, those dividends are also taxed. The tax on the dividends is collected from the shareholders. The maximum dividend tax rate is 23.9%.

Imagine a corporation has a profit of $1 million and decides to pay out all of the after-tax profit to the shareholders. How much money would the shareholders have after taxes?

SE1

One million dollars of corporate profit could be taxed as high as 54.34% leaving $456,600 to the shareholders after all taxes are paid. This is certainly a disadvantage for U.S. corporations.

Final Thoughts

It is important to be aware of the characteristics of corporations in order to decide how to form a new business venture. It is also important to know these characteristics when working with corporations.

Share This:


Related pages


how to do adjusting journal entriesmerchandise inventory is classified on the balance sheet as ahow does the accounting equation workis indirect labor a period costretained earnings examplesthe income summary account is a permanent accountmerchandising firmsraw material turnover ratiopercent of sales calculatoradjusting entries worksheet examplesmerchandising companies definitionpresent value lump sum tablehow to calculate machine depreciationdefine warranteedollar value lifo calculatoryear end closing entries accountingsales returns accountingwhat is fifo and lifo methods of inventoryhow do you calculate variable costdeclining balance method of depreciationaccounting entry for provision for doubtful debtscalculate present value of an annuitywhat are some variable expensesstep variable cost examplebudgeted income statement template excelunadjusted income statementpv annuitydouble declining balance method depreciation calculatorwhy closing stock not in trial balanceannual simple interest formuladebit vs debthow to calculate ending inventorywhat is a good contribution marginmanagerial accounting formulasinventory journal entries examplesincremental net incomefifo method of stock valuationbank reconciliation adjustmentsfifo vs lifo examplesinventory turnover calculator onlinemerchandising companies examplespayroll deduction calculator 2014calculate ordinary annuityjournalize the adjusting entriesfederal medicare tax ratewhen should a company discontinue operationssalaries payable journal entrybond payable balance sheetadjusting entry for prepaid renthow to calculate profit margin in accountingpresent value of lump sumcalculating reducing balance depreciationpresent value interest factor of annuity tabledepreciation expenses definitionhow to calculate manufacturing overhead costsvariable costing versus absorption costingabsorption costing methodfifo ending inventory calculatorwhat are current liabilities examplescalculate social security wagesjob order costing system examplepayroll calculator netpurpose of statement of retained earningsjournal entry for dividend paymentwhat is the current medicare tax ratewhich accounts normally have debit balanceshow to calculate weighted average unit contribution marginbonds accrued interestexample of a wholesalerincome tax expense journal entryaccumulated depreciation financial statementbad debt write off policy samplecalculating paycheck deductionsperpetual lifo examplevariable costing method income statementservice charge reconciliation