 In this presentation, we will take a look at the corporate form of business organization. As we go through the corporate form, you want to be able to compare and contrast this and think in your mind what is different here between the corporation and other types of business entities like a partnership, like a sole proprietor. So when we take a look at any of these one types of entities, it's useful for us to make that comparison, think about what is the corporation, how is the corporation different, and how is it similar to other business entity formats. Note that as we go through the corporations, we will be focusing in on those areas that are different, and that could lead us to start to think that all business entities are going to be very different in the way we record transactions and the way they interact. But really, they're not. Most of the transactions will be much the same. We as accountants will always have the corporations separate from us, will record the double entry accounting system and will still be in balance. All of that will remain the same. Where we focus on for these different types of entities will be the areas where they differ. For corporations, as with all entities, where they differ most is the format of ownership, the equity section, in this case, stockholders' equity for a corporation. So corporate overview, what are going to be some differences between the corporation? We are focusing in on those differences. One is that it's going to be a separate legal entity, and that kind of leads to some of the other differences. That's the major breakthrough of a corporation. When a corporation was kind of invented, the idea of the corporation was behind the fact that it is a separate legal entity. Now from a bookkeeping perspective, that's not a whole lot different from how we treat the books all the time. If we are a sole proprietor, even if we file on a schedule C, a tax return on our normal individual income taxes for our business as a sole proprietor, we still look at our business as a separate legal entity in order for us to judge how the company is doing. In other words, we want to see our revenue and expenses from our business side separate from our personal revenue expenses. We want to measure our performance from a business perspective different from our performance from a personal perspective. The objectives are different. Business, we're looking to get revenue. From the personal side, we're looking to live well. So those are two different objectives. We always keep the bookkeeping separate. But the corporation is a separate legal entity, meaning that the actual legal component of it has given it certain rights, which typically are only given to individuals, such as the right to own property and the responsibility to do things such as pay taxes. Some of the major benefits of being a separate legal entity is that because it actually owns property in and of itself, the entity does, then when you sue a corporation or if they have any liability problems, then you're really going after that corporate entity and not necessarily the owners of the corporate entities, so it provides some liability protection. So it's going to have rights and privileges in and of itself, again, giving the corporate entity certain rights and privileges to own property, and therefore the responsibilities along with those rights and privileges. Corporation could either be privately held or publicly held. When we think about corporations, we typically think about big corporations like Apple or Google and we typically think about publicly held corporations. But privately held would basically mean that the stock is not being traded on a public stock exchange. So in other words, if it's not traded on a public stock exchange, you're not going to be able to go and basically just buy and sell the public shares through the public stock exchange. It's going to be privately held. Publicly traded companies means that basically we can sell through a public exchange. The public exchange will typically allow for the public to purchase the stock and have a lot of potential, therefore, to raise capital investment through the sale of stock. Corporate characteristics include the separate legal entity and note that's going to be the main or big difference between a corporation and a sole proprietor or partnership. We also have the limited liability, which kind of stems from the separate legal entity. Because there's a separate legal entity, the shareholders are going to have limited liability. That's a huge benefit because it allows us as even small investors to buy something like a mutual fund or something like that, have an equity interest in a corporation, but not have to worry so much that if the corporation goes under, if they do something bad, if they get sued or something like that, then the court, we might lose our investment. But they shouldn't therefore be able to come after our house, our personal assets. That's a huge benefit that allows for investment into something like corporations and allows for business to get the capital needed to thrive. We have transferable ownership, huge benefit as well. We know that especially for a publicly held stock, that they're going to be traded on the stock exchange. When we see purchases of something like an Apple or like a Google type of stock, you're not typically buying those stocks from the corporation. They typically have an initial stock offering and could issue stocks at a later point. But the stock being traded all the time is simply stock that's being traded from trader to trader. And the beauty of the stock then is that the shares are all the same. So if one shares just like selling tokens or something like that, that all have the same value. The value will change over time as people perceive the value of the company to change. But all the stock theoretically should be the same in terms of units of the corporation and therefore all have the same value that's being traded. So that means that allows for that transferability something that we don't have in something like a partnership as easily note that if we're in a partnership and you want to add a new partner or sell your partnership interest, you will typically need the go ahead from the other two partners and it's a complex transaction to do that because you have to figure out how much of the interest you're going to sell and what the value of it is for the corporation because all the stocks are the same, then that transaction to buy and sell the corporate stocks becomes a much easier thing to do. We have the continued life again stemming from the separate legal entity concept. If you're a partnership or a sole proprietor, then you're really not separate legally from your business. Again, from a bookkeeping standpoint, you are, but because we're going to we're going to account for the books separately as if you're separate, but you're not really separate in terms of a legal sense. And that means that if when someone dies or something happens or, you know, if they someone quits, if a partner quits or something like that, that basically ends the partnership and then needs to be reformed. For a corporation, that's not the case. If any person in the corporation dies, whether it be the CEO, the founder, then the corporation lives on because the corporation has been given certain characteristics, including a life, you know, basically the ability to claim assets and what to have those characteristics that typically individuals have. And those characteristics can continue beyond any single individual. No mutual agency of stockholders. Now this is really referring to a problem with a partnership, which is a mutual agency problem, meaning typically thought of as a problem, meaning if two people get into a partnership or more people go into a partnership, then all the partners can make contractual agreements and bind the other partners in an agency problem, an agency issue, meaning that the partnership then is responsible for the duties of whatever contract was agreed upon. And so one partner can make all other partners basically responsible for that. The reason it's not there for a corporation, even though we may have far more owners of a corporation in terms of stockholders, is that the stockholders cannot make, you know, normal. Usually the stockholders are a step removed from the decision making process, meaning the stockholders will then vote, but they're not going to vote on day-to-day decisions. They're not going to make contractual agreements typically. They typically will vote for the board of directors who will then hire management, management then making the decisions. So that's going to be a few steps removed then from a partnership type of situation. And again, there's pros and cons to that format, but you don't have the same type of agency problem as you do with a partnership. Ability to accumulate capital. This is one of the huge benefits of a corporation if you're a sole proprietor or a partnership and you have an idea and you want to implement this idea, then it might be more difficult to raise the money for it because you'd have to get a loan for it, which may be difficult to do. To get equity interest, you'd have to get another partner to have the equity interest, which is possible, but when you have the ability to share, to sell stocks, and that becomes a lot easier to sell stocks to others, to potential investors to get that equity interest. So a lot more enticing to an investor for a corporate stock because of the liability protection. So if I'm going to invest, in other words, into a general partnership, and I'm worried that what happens if the partnership does something not very smart and they get sued or something, and then I have my personal resources, my personal assets that could be taken or could be exposed to some liability through investing into that partnership, whereas if we invest into a corporation, we should have that corporate shield. We shouldn't be personally liable. We should only be able to lose up to our investment. So that's a huge benefit to raising capital. Problems include the fact that there's going to be more regulations involved with a corporation to set up a corporation is typically more costly. And we've got to maintain a corporation is typically more costly. The other big problem is going to be that there's double taxation generally, meaning a corporation, a normal corporation, because once again, it's a separate legal entity, is responsible for doing things that a normal person would do, paying taxes being one of them. So they're going to have to pay taxes. And then the corporation, when it distributes those taxes to the owners in the form of dividends, the dividends are taxable. So now we've got the corporation paying tax. And then when they distribute to the owner, the owner typically will pay tax, whereas if you're a sole proprietor, then you have our separate business, but it really just flows through to the form 1040. And the owner pays taxes on the individual level. So that changes from, I mean, that double taxation kind of changes from whether or not how taxable those dividends will be could change as the laws change. But typically, you're going to get taxed on the corporate level. And then the dividends get taxed on the, if you're a sole proprietor or partnership, we call them draws, you draw out the money from the partnership. And because it's a flow through entity, then we're just going to tax all of the income and the draws will not be taxed at a separate, at a separate level. So that's going to be a huge downfall. You can also think that there is, we talked about the mutual agency being a benefit that it doesn't have that problem that a partnership could have. But the corporate structure is a lot more structured. So there could be issues with the corporate structure in that the owners are a step removed oftentimes from the decision making process. And that could lead to its own kind of agency problems in terms of management agency problems when they're making their decisions about the wellbeing of the company. Because management, of course, is there as an agent in order to represent the owners who are the stockholders, the stockholders who basically voted in the board of directors to decide on management. Because of that step removal, management may have incentives as an agent to act in ways that are more personally beneficial rather than beneficial for the stockholders. So we're going to do the same kind of comparison with business entities just to keep in mind the relative comparison, quick comparison between the different types of entities like a sole proprietor, partnership, LLP, LLC as corporation and corporation. So clearly we are here now, we're looking at the C corporation. And we're saying what's the difference between that between a proprietor, a partnership. And then remember, these three are kind of like hybrids of the two, we're trying to get the best of both worlds. And if you look at the extremes here, just you want to note that these two typically have the problem of more liability problem, whereas the corporation being a separate legal entity has the benefit of liability protection. On the other hand, the corporation has the problem of double taxation because their separate legal entity need to be taxed at the corporate level, whereas the sole proprietor and partnership don't have the double taxation because they're a flow through entity. And then these three are attempts to be hybrids. So attempts to have the best of both worlds, attempts to have liability protection while still being able to have that that's not being taxed on a double taxation. So this is a limited liability partnership, a limited liability company and S corporation. Okay, so legal entity, the proprietorship is not a separate legal entity. Again we have the books kept kind of in a separate way, but the proprietorship itself is not a separate legal entity. Neither is the partnership, neither is the limited liability partner. The limited liability company, on the other hand, this hybrid method is going to be the separate legal entity, as is the S corporation, and of course the corporation is the separate legal entity. So then if we talk about the limited liability, which is kind of an extension of the legal entity, meaning the proprietorship, because it's not a separate legal entity, does not have the benefit of a limited liability, meaning they are, the personal liabilities of the owners are exposed to any kind of problems, any kind of lawsuit or something like that. Same for the partnership, they don't have that benefit of the limited liability. The limited liability partner, only the partner that is not engaged, the limited partner that's not engaged in the day-to-day operations, they have a benefit. And so this format could be really beneficial if we have a good idea, but we need to get capital and we want to get an investor that has limited liability, whereas we are just a normal partner. We get the benefits of being a partnership, which include things like we get a flexibility with our arrangements and our profit sharing, and we get the investment of the limited partner who is not exposed to the liability protection and therefore more likely to invest. A limited liability company does have the benefit of a limited liability, as does an S corporation, as does of course a corporation. Then we've got the business tax, are they going to be taxed at the business level? A sole proprietor, no. And this is going to be a benefit of the sole proprietor, why? Because if you're taxed on the business level, typically you'll have double taxation, because they'll be taxed at the business level, and then you'll be taxed at the distribution level. On the proprietor, you're taxed just as the business is taxed, net income taxed on the 1040, distributions in the form of draws then are not going to be taxed again. Same with the partnership, not taxed at the partnership level, taxed at the partners level on their individual 1040. The LLP, again, it's treated like a partnership, not taxed on the business level, but on the individuals. The LLC, limited liability company, still taxed on the individual level. That's the benefit. We're trying to get that liability protection by being a company type, but still have that flow-through process taxed on the individual 1040s and therefore not have the double taxation. Same for an S corporation. This is more towards the corporation, but still we have that flow-through process that the tax is not going to be imposed on the corporate side, could change for states, by the way, but for the federal tax, and then it's going to be taxed on the individual's 1040. A corporation will be taxed on the corporate level, and that's the problem because once it's taxed on the corporate level, it will most likely or oftentimes be taxed at distribution as well in the form of dividends, meaning we'll have the double tax. Can we have just one owner? Clearly, a proprietorship could, a partnership cannot. If your partnership, by definition, you have two or more people, two or more individuals or organizations or something involved in it. The LLP cannot, it's going to be a partnership. The LLC, generally, you can, and that seems like a contradiction, so there's a sole owner LLC possible, and the laws could change from state to state in terms of that. The S corporation, you can, corporation, you can. So note that you can have one individual, in other words, owning the entire, you could incorporate and own all the stock of a corporation or an S corporation. Okay, so if you take a look at the hierarchy for a corporation, it's similar to that of a government, so if you look at a democracy, you think of we the people or the people that are supposed to be the ultimate owners of the country, and how do we exercise our ownership? Well, we vote. We vote for representatives, and then the representatives are going to hire people in order to do what needs to be done or what not. So the corporation form is much of the same, meaning the owners are called stockholders. What's the major benefit of being a stockholder? You get to vote for the decision makers. You get the board of directors. And the board of directors major goal is to represent the stockholders and therefore, you know, do the best thing they can for the business, hire management, and then the management will be there in order to act as agents of the stockholders, and they will hire other employees in order to run the business. Similar structure, we're going to be a step removed then as the owners. So again, if it's a closely held corporation, then you're going to have more influence. If you're someone that owns a few stocks of a publicly traded corporation, then you're similar to voting in that your vote counts, but it's not going to be the hugest influence depending on how big the corporation is. If we own a lot of stock, if we own 51%, then we have complete influence in terms of what's going to happen. So again, if you own something like a publicly traded stock, like if you own a few stocks of Apple or Google, then you're not going to have much influence, although you still have the voting right in a similar fashion as when you vote for a representative, your single vote probably isn't going to be that influential, but still the populace has the power of that vote to vote for representatives, representatives who then make decisions, including hiring management, management, then acting as agents in order to hire other employees and run the business. So if you think about the hierarchy, then you can have something like, you know, it's the stockholders, then the board of directors, and then you've got like the president and whatnot, and then the vice presidents here that we can break out and you can think of the whole corporate structure that we can have, which will differ based on the type of industry that we have and how centralized versus decentralized we can have it. But just note that the corporate structure is typically going to be a very structured type of corporate structure, almost like a military type of structure that we're going to have here, the stockholders being the ultimate owners, but they hire the board of directors and then you're going to have the structure of the organization, which could include the top management such as a president, and then the folks below them and then below them in terms of the hierarchy, which again could be broken out in terms of a very centralized system or in terms of a more decentralized manner. Stockholder rights, the stockholder has a right to vote for on stockholder meetings, and which is huge. So the stockholder has that ability. And when you think about being a closely held company or a sole proprietor versus a publicly traded company or a corporation, when you when you sell stock note that, of course, you're giving someone not only an equity interest to earn some of the revenues in the company, but also a say, a vote in what's happening in the company. So it's important to keep that in mind. The right to sell stock. So again, the corporate stock being something that's standardized allows us to be able to sell the stock in a much more easier fashion than if we were, say, a partnership, receive dividends. Now note that that's a right. So unlike a partnership where when you have a draws of the partnership, each individual owner can make draws in accordance with their capital account and the agreements of the partnership agreement with the dividends involved here, because all the stock is the same. One of the benefits and drawbacks is that you can't just be a corporate owner and draw out whatever you want, no matter how many stocks you have, because the dividends need to be the same for all shares. So if there's a decision to give dividends and you are an owner of the stock, you are entitled to a dividend equivalent to however many stocks you have and the distribution. So again, that's a benefit and can be kind of thought of as a drawback too, but that's part of the standardization of the corporate stock. So when the stocks are leaving the company, when we, the company that makes a decision to give some of the earnings back to the investors, we do it in the terms of dividends instead of draws. And therefore, and because all the stocks are the same, we have to give an equal dividend to all common stockholders. Stock certificate. Now, a lot of times the stock certificate oftentimes is now something we might not physically have. You can think of a stock certificate in our safe deposit box or something, but typically it's an electronic certificate, but it's still going to be a share of stock as a unit of ownership. And that's going to give us proof that's going to be the proof of ownership of a stock within a company. When looking at the financial statements, the stockholders equity section is often one of the most confusing components. We here are going to look at the component of the stockholders equity related to the common stock. One of the confusing components of it is that we'll have this kind of terminology that will be included oftentimes. And this is a benefit, but it can also be a little confusing to look at. It's part of the standardization that we have for a corporation. Remember, remember that if we're talking about a sole proprietor or partnership, we're just going to try to track the capital accounts, how much is owed to individual owners. When we go to a corporation, however, we're not tracking by individual owners. We're not going to have, this is Sam, this is Eric's, this is Lisa's capital account. That's not what we have because what we have as a standardized set of shares that are out there, doesn't really matter who even owns them on the financial statements. We need to determine who owns them when we give the dividends and whatnot. But in terms of the financial statements, we need to say, this is how many shares are outstanding. This is how many shares are out there. They're all the same. All the shares are the same. They all have the same par value. Now, this isn't the market value. This isn't what we actually sold them for. We're just going to give this arbitrary par value number. That arbitrary par value number makes it easier for us to standardize these shares. And then we also list out the number of shares that we could issue. These are the number of shares authorized to issue. So in other words, we can say, this is basically saying that this company could issue 150,000 shares. They have the legal right to do so. They have only issued and have outstanding 100,000 shares. And there's a par value of five dollars, which is not the market value. That's not what we sold it for. That's not how much you can buy shares for. But it gives a standardization of the shares. In other words, if I take this 500,000 here and divide it by five. That's how many shares are outstanding, the 100,000. So that kind of standardization is what that par value is for. This represents, similar to just the investment or part of the investment that was put into the company, as opposed to the accumulation of value of revenue minus the distribution, which will be retained earnings. So note that the par value is not the same as the market value. So when we see the common stock on the books, if there is a par value, which a lot of times there will be, it's an arbitrary number, which seems unusual at first, but it's there to give a standardization component. We'll talk more about that arbitrary number and why it's not the market value, how it relates to the market value, how to record the issuance of stock when we will sell it for the market value, when there's a par value in later presentations.