Corporations (ACCOUNTS Notes)

Question 1

Definition of a Corporation:

Answer 1

A corporation is a legal entity that is separate and distinct from its owners. Its continued existence depends upon the statutes of the state in which it is incorporated. It has most of the rights and privileges of a person but can’t exercise certain privileges that only a living person can.

Question 2

Shareholders of Corporations:

Answer 2

Shareholders can be individuals or other companies. They provide capital and receive a return in the form of dividends. Shareholders have limited rights over the day-to-day running of the company.

Question 3

Board of Directors of Corporations:

Answer 3

The Board of Directors is appointed to run the company on behalf of shareholders. They have a great deal of autonomy and are often shareholders themselves.

Question 4

Classification of Corporations:

Answer 4

Corporations can be classified by purpose and ownership. For-profit corporations are organized to make a profit, while not-for-profit corporations are organized for charitable, medical, or educational purposes. Ownership classification differentiates publicly held and privately held corporations.

Question 5

Reporting Requirements for Limited Liability Companies:

Answer 5

The reporting requirements for limited liability companies are much more stringent than for sole traders or partnerships. It includes registering at Companies House, completing a Memorandum of Association and Articles of Association, having at least one director (two for a public limited company (PLC)), preparing financial accounts for submission to Companies House, auditing financial accounts (larger companies only), and distributing financial accounts to all shareholders.

Question 6

Characteristics of a Corporation:

Answer 6

Corporations have a separate legal existence and act under their own name rather than in the name of their stockholders. They also offer limited liability to their stockholders, have transferable ownership rights, and the transfer of ownership rights between stockholders normally has no effect on the daily operating activities of the corporation.

Question 7

Limited Liability of Stockholders:

Answer 7

Creditors have recourse only to corporate assets to satisfy their claims, and the liability of stockholders is normally limited to their investment in the corporation. Creditors have no legal claim on the personal assets of the owners unless fraud has occurred.

Question 8

Transferable Ownership Rights:

Answer 8

Shares of capital stock give ownership in a corporation, and these shares are transferable units.

Question 9

The transfer of stock is entirely at the discretion of _______ and does not require the_______the corporation or other stockholders

Answer 9

The transfer of stock is entirely at the discretion of the stockholder and does not require the approval of either the corporation or other stockholders

Question 10

. The transfer of ownership rights between stockholders normally has no effect on the daily operating activities of the

Answer 10

corporation.

Question 11

Characteristics of a Corporation

Answer 11

Separate legal existence
➢ LIMITED LIABILITY OF STOCKHOLDERS
➢ TRANSFERABLE OWNERSHIP RIGHTS
➢ ABILITY TO ACQUIRE CAPITAL
➢ CONTINUOUS LIFE
➢ CORPORATION MANAGEMENT
➢ GOVERNMENT REGULATIONS
➢ ADDITIONAL TAXES

Question 12

Ability to Acquire Capital:

Answer 12

A corporation can obtain capital through the issuance of stock.
Buying stock in a corporation is attractive to investors because it offers limited liability and shares are readily transferable.
Multiple individuals can become stockholders by investing relatively small amounts of money.

Question 13

Continuous Life:

Answer 13

The life of a corporation is stated in its charter and may be perpetual or limited to a specific number of years.
A company can extend its life by renewing the charter.
The withdrawal, death, or incapacity of a stockholder, employee, or officer does not affect a corporation’s continuance as a going concern.
A successful company can have a continuous and perpetual life.

Question 14

Corporation Management:

Answer 14

Stockholders legally own the corporation but manage it indirectly through a board of directors they elect.
The board formulates operating policies for the company and selects officers to execute policy and perform daily management functions.
The board is now required to monitor management’s actions more closely due to the Sarbanes-Oxley Act.
The separation of ownership and management often reduces an owner’s ability to actively manage the company.

Question 15

Government Regulations:

Answer 15

A corporation is subject to numerous state and government regulations.
State laws prescribe requirements for issuing stock, distributions of earnings, and acceptable methods for buying back and retiring stock.
Government securities laws govern the sale of capital stock to the general public.
Publicly held corporations are required to make extensive disclosures of their financial affairs to the SEC through quarterly and annual reports.
A corporation must comply with reporting requirements when listing its stock on organized securities exchanges.
Government regulations are designed to protect the owners of the corporation.

Question 16

Additional Taxes:

Answer 16

Corporations must pay income taxes as a separate legal entity, which can be substantial.
In Zambia, the company income tax is 35%.
Stockholders must pay taxes on cash dividends (pro rata distributions of net income).
Owners of proprietorships and partnerships report their share of earnings on their personal income tax returns, and the individual owner pays taxes on that amount.

Question 17

List 5 Advantages of a corporation and explain:

Answer 17

Limited liability: Investment is less risky than being a sole trader or investing in a partnership. However, lenders to a small company may ask for a shareholder’s personal guarantee to secure any loans.
Raising finance: Limited liability makes raising finance easier (e.g. through the sale of shares) and there is no limit on the number of shareholders.
Separate legal identity: A limited liability company has a separate legal identity from its shareholders, so the company continues to exist regardless of the identity of its owners.
Tax advantages: There are tax advantages to being a limited liability company. The company is taxed as a separate entity from its owners and the tax rate on companies may be lower than the tax rate for individuals.
Transferability of shares: It is relatively easy to transfer shares from one owner to another. In contrast, it may be difficult to find someone to buy a sole trader’s business or to buy a share in a partnership.

Question 18

List 5 Disadvantages of a corporation and explain:

Answer 18

Disadvantages of trading as a limited liability company:

Annual financial statements: Limited liability companies have to publish annual financial statements. This means that anyone (including competitors) can see how well (or badly) they are doing. In contrast, sole traders and partnerships do not have to publish their financial statements.
Compliance with legal and accounting requirements: Limited liability company financial statements have to comply with legal and accounting requirements, particularly with accounting standards. Sole traders and partnerships may comply with accounting standards for tax purposes.
Auditing requirements: The financial statements of larger limited liability companies have to be audited. This can be inconvenient, time-consuming, and expensive.
Regulation of share issues: Share issues are regulated by law. For example, it is difficult to reduce share capital. Sole traders and partnerships can increase or decrease capital as and when the owners wish.

Question 19

Grant of state charter: A corporation is formed by grant of a state charter, often referred to as the articles of incorporation, which describes

Answer 19

the name and purpose of the corporation, the types and number of shares of stock that are authorized to be issued, the names of the individuals that formed the company, and the number of shares that these individuals agreed to purchase.

Question 20

Establishment of by-laws: Upon receipt of its charter from the state of incorporation, the corporation establishes by-laws which establish the

Answer 20

internal rules and procedures for conducting the affairs of the corporation.

Question 21

License from each state: Corporations engaged in interstate commerce must also obtain a ___________from each state in which they do business.

Answer 21

license

Question 22

Costs incurred in the formation of a corporation are called ________________

Answer 22

Organization costs: Costs incurred in the formation of a corporation are called organization costs, including legal and state fees and promotional expenditures involved in the organization of the business. Corporations expense organization costs as incurred.

Question 23

Stockholder rights:

Answer 23

Vote in election of board of directors at annual meeting and vote on actions that require stockholder approval.
Share the corporate earnings through receipt of dividends.
Pre-emptive right: Keep the same percentage ownership when new shares of stock are issued.
Residual claim: Share in assets upon liquidation in proportion to their holdings, paid with assets that remain after all other claims have been paid.

Question 24

The law governing the preparation and publication of the financial statements of limited companies in Zambia is contained in ____________

Answer 24

company Acts.

Question 25

Limited liability companies, more commonly referred to as limited companies, came into existence originally because of ____________

Answer 25

the growth in the size of businesses and the need to have a lot of people investing in the business who would not be able to take part in its management.

Question 26

The accounting rules for limited liability companies are similar to those of sole traders, but there are

Answer 26

fundamental differences.

Question 27

National legislation governing limited liability companies is often extensive, specifying accounting records that

Answer 27

must be maintained and minimum information to be disclosed in the accounts.

Question 28

Public companies have an authorised share capital of at________, while private companies do not __________

Answer 28

Public companies have an authorised share capital of at least K50,000, while private companies do not have to offer their shares for subscription to the public at large.

Question 29

Shares of public limited companies are traded on the _________, while private companies cannot offer their shares for __________.

Answer 29

Shares of public limited companies are traded on the Stock Exchange, while private companies cannot offer their shares for subscription to the public at large.

Question 30

Companies listed on the stock market in Zambia enjoy a __________ tax reduction.

Answer 30

2%

Question 31

Sole traders and partnerships have _______liability, while ________liability companies offer _______liability to their owners.

Answer 31

Sole traders and partnerships have unlimited liability, while limited liability companies offer limited liability to their owners.

Question 32

Limited liability means that

Answer 32

the maximum amount an owner can lose if the company becomes insolvent is his share of the capital in the business.

Question 33

Limited liability is advantageous in attracting investors, as they only stand to lose

Answer 33

the amount they invest.

Question 34

A limited company has a _________identity from its shareholders and can ________them, and shareholders can ________the company.

Answer 34

A limited company has a separate legal identity from its shareholders and can sue them, and shareholders can sue the company.