 Hello, it's Maylin Chao. This is Basic Forms of Business Organization, Module 4a, Part F. In this part we will finish our examination of the corporation by looking at how a corporation is financed, the taxation of a corporation, and the dissolution of the corporation. A corporation may be financed with either debt financing or equity financing or a combination of the two. And it's more often that it is the combination of the two. Debt financing refers to a corporation borrowing money or obtaining a loan from shareholders, commercial lenders such as banks, investors, or any other creditors. Equity financing refers to capital that's obtained by the corporation in exchange for issuing shares to the person who provided the capital. So those shares generally represent the claim to the residual value of the corporation after all debts and other claims are paid. So essentially it's the value of the company or the corporation that's left over after all debts and liabilities are taken care of. So that's what we refer to as the residual value. So generally speaking, especially with common shares, and we'll talk a little bit later, differentiating common share and preferred shares, with common shares the value of those shares will increase along with the value of the corporation's business. And generally speaking, shares are considered to be riskier than debt. Debt is almost always required to be repaid first before repaying any of the shareholders. And also when we did module 4.1, we looked at all the different types of security interests that would make the repayment of the debt more safer for the lender. With equity financing, which involves the corporation obtaining capital by issuing shares, every corporation must issue shares that provide at least these three basic rights. So all three of these basic rights don't have to be in one type of share, but they can be found at the very least in different types of shares that are issued by the corporation. But the most simplest way is to issue one class of common shares that has all three of these basic rights. The first right is the right to vote for the election of directors. And we'll talk a little bit later about what directors do. The second basic right is the right to receive dividends when declared by the board or director. So dividends are the payment of net profits by the corporation to the shareholders. And those dividends need to be declared by the board of directors. The third basic right is the right to receive property that remains on dissolution after all debts are paid. So when a corporation is being dissolved or being wound up, what we do is we liquidate all the assets of the corporation and we take the money from those liquidated assets to pay off all of the debts of the corporation first. And then if there's still money left over, then we parcel it out to the shareholders. So again, these three basic rights can be attached to one single class of shares, which would be the most simplest way of doing it. So that class of shares would usually be called common shares. Or these three basic rights can be allocated to more than one class of shares. The ownership of shares may be transferred from one person to another. However, that ability may be restricted under either a shareholders agreement or articles in the corporation. And that typically arises in the context of a private corporation. In contrast, a partnership interest usually cannot be transferred without the consent of all the partners. So generally speaking, the ownership of shares is more easily transferable as compared to a partnership. How is a corporation tax? Because a corporation is considered to be a separate legal person, any net income or losses that are earned by the corporation belong to just the corporation. They cannot be claimed by the shareholders. So are more specifically unlike with a sole proprietorship or a partnership where business losses can be claimed on the personal tax returns of the owners. With a corporation, any net business losses can only be claimed by the corporation. They cannot be claimed by the shareholders. And because the corporation is a separate legal person, the corporation files its own tax return and pays its own corporate income tax on its net income. Now the shareholders do pay tax at some point. When the corporation decides to pay some or all of its net profit in the form of a dividend payment to its shareholders. In the year that shareholders receive those dividends, the shareholders have to report those dividends as income on their personal tax returns and pay personal tax on those dividends. Let's see graphically how corporate taxation works. We have a corporation with a shareholder. The corporation earns business income. On that business income, it will pay corporate income tax. And with its after tax income, it will use that to pay dividends to its shareholder. The shareholder pays personal tax on those dividends. So there's corporate tax paid by the corporation on its business income and personal tax paid by the shareholder on the dividends that the shareholder receives from the corporation. Let's compare that with a sole proprietorship or partnership. So there's our sole proprietor or partner. So for either a sole proprietorship or a partnership, there's one tax that's applicable. There's the personal tax on the net business income that's payable by the sole proprietor or the partner. Because remember, with the sole proprietorship or partnership, the owner and the business are one and the same. I mentioned earlier that since a corporation is a separate legal person, it can live on even on the death of a shareholder, director or officer. However, a corporation can be terminated by dissolution only if, firstly, all of its debts have been paid. And then all of its remaining assets after having paid all of its debts, whatever remains, has to be distributed to its shareholders. And at least two-thirds of the shareholders have voted to approve a special resolution authorizing the dissolution.