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Corporate Characteristics Proposal Katherine Collinge, Moses Gatson, Tanya Mueller, and Terri Sturgeon University of Phoenix ACC/363 Financial Accounting II Bob Wells April 27, 2009 Corporate Characteristics Proposal Introduction here Various Forms of Business Organizations Before starting a new business, several decisions such as its legal structure must be made first. Five basic entity types exist in which to structure a business. These types consist of sole proprietorships, partnerships, limited liability companies (LLC), C corporations, and S corporations.
When determining the type of structure to use, comparison of different factors such as liability to the owners, taxation, and management controls must be conducted. Sole Proprietorships The sole proprietorship has one owner that is completely liable for the actions of the company but has total control over all decisions. The profit or loss of the business is reported and taxed on the owner’s individual tax return. Partnerships A partnership has two or more owners who share control and management decisions of the company.
Profit or loss is split between the owners based on a predetermined percentage rate, usually determined by investment or activity in the company and reported on each individual’s income tax report. Limited Liability Companies (LLC) A limited liability company combines the attributes of a partnership with the limits on liability of a corporation. The profits and losses of the company still pass to the owners as in a partnership, but the losses can only offset other income up to the amount the individual invested. Formal action is not required to form a LLC, but articles of organization are filed with the proper state department.
Management is still controlled by the owners. C Corporation A C corporation is the basic form of corporation in the United States. The amount of shares of stock a C corporation can issue is unlimited and traded freely. The C corporation files its own tax return instead of showing profit and loss on the owner’s personal returns. The dividends issued to the stockholders are however, subject to individual taxes also, causing a double taxation effect. In addition, the C Corporation pays employment taxes on active shareholders salaries by differentiating between passive and active income.
S Corporation The S corporation is limited to the amount of shares of stock it can issue to 100 United States shareholders. In addition, this form of corporation is limited to one class of stock. The S corporation is different from the C form because it is taxed only through the income that flows to the individual shareholders. Employment taxes are paid on active shareholders salaries but not on passive shareholders. Management in Corporations Managerial control has a top-down approach that is highly formal and answers to the board of directors in both the C form and the S form corporations.
Liability to the shareholders is limited to their investment in the company. Characteristics of a Corporation The corporation form of business style is different in several ways from other styles of business. The characteristics of the corporation business style must be taken into consideration before starting a new corporation. These characteristics are different from other business styles. Separate Legal Existence A corporation is a legal entity or business that is legally separate from its owners. This type of business structure has almost as many rights as a person.
The corporation can buy and sell, sign legal documents, borrow or loan money, and can also be sued or sue others. Just like any person, a corporation is subject to the laws of its state and the federal government, it must also file and pay taxes. The corporation does not have voting rights though, or cannot hold a governmental office. Limited Liability of Stockholders The owners of a corporation have limited liability; this is usually limited to the amount each individual has invested in the company. Creditors cannot place a legal claim against the personal belongings of a corporation’s shareholders.
Transferable Ownership Rights The management of a corporation issues a predetermined amount of stock shares to investors. After these shares are issued, the investor has the right to sell all or part of their shares of stock to outside investors. Management does not become involved in the transfer of the stock. The transfer of stock does not affect the operation or function of the corporation. Ability to Acquire Capital A corporation can normally acquire more capital by issuing stock in the company. The corporation is generally not limited to the amount of capital in can generate through the issuance of new stock.
The board of directors must approve the issuance of new stock. Continuous Life Each corporation creates a charter when it begins. The length of time the corporation will operate is determined and stated in the charter. This can be a certain length of time, but is usually continuous. A corporation is not limited to the life or death of its owner(s) and is not affected when a stockholder sells their stock, becomes ill or incapacitated. Corporation Management The corporation is owned by its stockholders, these stockholders elect a board of directors that oversee the activities of the company.
The board of directors appoints officers like a president, vice-president, controller, and treasurer. The officers of a corporation do not have to be stockholders. The board of directors also set into place policies and procedures for the company. Government Regulations The corporation is restricted or governed??by state and federal regulations. Governmental regulations are set in place to protect the stockholders of a corporation. Federal and state policies define requirements about the issuance and sale of all forms of stock, plus how stockholders’ earnings are dispersed.
Financial records are disclosed either quarterly or annually to the Securities and Exchange Commission. Regulations on corporations are intended to safeguard the stockholders of the company. Additional Taxes Because corporations are separate legal entities, this form of business must pay state and federal income taxes unlike a sole proprietorship or partnership. Corporate taxes are paid on its taxable income with taxes possibly reaching over 40 percent. In addition, the stockholders must pay taxes on the dividends received from the C Corporation business form.