I. Corporate form of organization
There are three primary forms of business organization : * The proprietorship * The partnership * The corporation
The special characteristics of the corporate form that affect accounting include : 1. Influence of state corporate law 2. Use of the capital stock or share system 3. Development of a variety of ownership interest 1. State Corporate Law
Anyone who wishes to establish a corporation must submit articles of incorporation to the state in which incorporation is desired. After fulfilling requirements, the state issues a corporation charter, thereby recognizing the company as a legal entity subject to state law.
It is to the company’s advantage to incorporate in a state whose laws favor the corporate form of business organization. For example, consider that nearly half of all public corporations in the United States are incorporated in Delaware. Why Delaware? The state has a favorable tax and regulatory environment, resulting in Delaware being home to more corporations- in public and private- than people.
Each state has its own business incorporation act. The accounting for stockholder’s equity follows the provision of these acts. 2. Capital Stock or Share System
Stockholder’s equity in a corporation generally consists of a large number of units or shares. Within a given class of stock, each share exactly equals every other share.
In the absence of restrictive provisions, each share carries the following rights: 1. To share proportionately in profits and losses. 2. To share proportionately in management (the right to vote for directors). 3. To share proportionately in assets upon liquidation. 4. To share proportionately in any new issues of stock of the same class—called the preemptive right.
The first three rights are self-explanatory.
The last right