Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

THE CORPORATION The Corporation In Volume I, Chapters XLVIII and XLIX, the fundamental characteristics of the corporation were explained and discussed briefly and some of its peculiar accounting features were set forth. Here these matters will be gone into more fully and additional aspects of this type of organization will be treated. In Volume I were explained the advantages and disadvantages of the corporate form, the procedure incident to the formation of a corporation, its charter, officers, working organization and management, the records peculiar to a corporation, the showing of proprietorship, opening the corporation’s books, booking premium and discount on stock, change from partnership to corporation, the distribution of profits, dividends, etc. Only so much of the information already presented will now be repeated as may be necessary to make the treatment here complete. Classification and Definitions As instruments for the transaction of business, corporations may be classified in a number of ways. First, all corporations are either public or private. Public corporations are the governmental organizations set up to transact the collective business of a city, a county, a township, or school district. Private corporations are divided into two subclasses, stock and non-stock. Under stock corporations are included all those organized to carry on business for a profit. Under non-stock corporations are included all those organized to carry on non-profit-making enterprises, such as libraries, hospitals, religious organizations, eleemosynary undertakings, etc. Under the head of stock corporations we may have the following subclasses: (a) industrial or manufacturing, (b) commercial or trading, (c) public utility or quasi-public, and (d) financial, i.e., banks, trust companies, insurance companies, etc. From the standpoint of the sovereignty to which allegiance is due, corporations are either domestic or foreign. A corporation is domestic in the state in which it is organized; foreign in any other state or country. Thus corporations chartered in New York are domestic in New York and foreign in New Jersey and Canada. A foreign corporation may be at a distinct disadvantage with a domestic corporation. To obviate this, one occasionally sees a separate incorporation in every state in which a concern intends to do business. Very infrequently is a domestic corporation subject to more stringent supervision and regulation than a foreign. From the standpoint of the fact of incorporation, corporations may be classed as (1) de jure and (2) de facto, the former comprising those which have met fully all legal requirements for incorporation, the latter comprising those which have not met fully all legal requirements but are to all intents and purposes corporations in fact. Method of Ownership Business corporations are sometimes spoken of as “open” or “close.” An open corporation is one in which ownership of the stock is not held closely but is being passed about, traded in, or transferred from one owner to a new. A close corporation is one in which the stock is held very closely in order to retain control and keep profits and trade secrets within a small compass of ownership. Thus some corporations are strictly family affairs; others are held by a few families or a small group. What is known as a corporation “sole,” while little known now, virtually exists in some close corporations, as where one man holds all but two shares of stock. The incorporation of a single individual is not legally possible in this country. The corporation, because of its peculiar advantages over other forms of business organization, has become the accepted form for most large enterprises. The gathering together of large capital funds, the ease and efficiency of management and control, continuous life, the facility of transfer of ownership, and the limited liability of the stockholders, make the corporate form attractive to the investor and absolutely necessary to the large businesses carried on today. In some states encouragement is given the small business to incorporate; in the State of New York, for example, the minimum limit of capitalization is only $500. In a few other states the old-time fear of the corporate form is still expressed in their general corporation laws in which the minimum limit for corporate capitalization is set as high as $10,000. Working Organization The peculiar features of the stock corporation are the method of ownership and working organization. This latter is effected through a board of directors who are responsible directly to the owners at periodic intervals. Within the board are its officers and committees to whom duties are assigned by by-laws, custom, common consent or action of the board. Under these official heads are the rank and file of the organization—department heads, clerks, employees, etc. It is not necessary to treat here this phase of the organization further. Different Classes of Stock The collective capital of a corporation is divided into shares of equal value. Ownership of a share or shares in a corporation is evidenced by formal certificates of stock. Each share carries with it the same privileges, powers, and duties of ownership as every other share of the same class. It represents a pro rata share of the total interest of its class. There may be several different kinds or classes of ownership within the corporation, these classes will have different privileges, and there may be other points of differentiation. The reason for setting up these different classes is almost always to secure additional capital from outside sources by making the investment as attractive as possible. Upon a reorganization, an adjustment of the various interests concerned may require a grading of ownership, a differentiation by classes in order equitably to satisfy the claims of all interested parties. These various classes of stock ownership will be discussed under the following heads: