 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at characteristic of corporation. This topic is covered in financial accounting introductory course, as well as the CPA exam far section. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting or I think finance and tax lectures. This is a list of all the courses that I cover, including many different accounting courses. If you like my lectures, please like them. It doesn't cost you anything. Share them, put them in playlists. If they benefit you, it means they might benefit other people. Subscribe to the channel and connect with me on Instagram. On my website, you will find additional resources, farhadlectures.com for your studies, such as multiple choice through false practice exercises. It's gonna help you tremendously if you are trying to pass the CPA exam and add those seven to 10 additional points to make sure you're in the safe zone of passing the exam. So let's talk about the corporation. What is a corporation? And where does the word corporation comes from? Corporation comes from the word corpus. Corpus is a Latin word for body. And basically what it means is the corporation is an entity. It's a corpus. It's a body created by law. It exists separate from its owners. So the owners, you could have one owner or many owners. Let's assume you have one owner that owns a corporation. Let's assume you own a deli. Well, you have one owner, that's one person, and the deli is another person. Although the owner owns the deli 100%, the deli is a separate from the owner themselves. And that's gonna create a lot of advantages. We'll see shortly in some of disadvantages when that's the case, because you have a separate ownership between the individual and the corporation, the deli itself. Here what we're talking about just to make sure we are talking about corporations that are considered C corporation, not S, not S corporation. S corporation is mostly covered in my tax course. So if you're interested in learning about S corporation, in this session, since we are dealing with financial accounting, we deal with S corporation. And since it's a separate legal entity, it has its own rights and its own privileges. Simply put, the corporation can be sued, can be sued, can enter a contract, so on and so forth, just like any in the visual. Ownership can be, for the corporation, can be private. So the ownership private means when you own the company, in most corporations are private. We're gonna have private and we're gonna have public. What is a private corporation? For example, Wawa, I'm not sure. This is my favorite store. It's in several states in the US, Pennsylvania, New York, New Jersey, you believe all the way south to a little bit further than Maryland, maybe south North Carolina. Then you have to skip to Florida, but basically, Wawa is a corporation, but Wawa is privately held. What does it mean privately held? I like Wawa, but I cannot have ownership in Wawa. I cannot buy stocks in Wawa. Okay, why? Because it's privately held. It means the people that holds the stocks, they cannot sell it to an outsider and really privately held, because some people that work at Wawa, they work at Wawa, and as a result, they get stocks. Stocks, it means form of ownership. Proof of ownership. If you own stocks, it means you own part of the company. And guess what happened? Once you no longer work at Wawa, you have to sell it back to Wawa or someone who works at Wawa. So they don't want anybody to own the stock. Also privately held could be a restaurant. For example, this lady here owns this restaurant. This could be a C corporation restaurant, and she can own the stock. It's privately held. So a corporation can be small or it can be large. It could be one individual or 5,000 individual that own the privately held corporation. And we could have a publicly held corporation, a publicly held corporation think about Amazon. What does that mean? It means if I want to own Shears and Amazon, which is a good company, I can. It's not a problem. It's not like Wawa. I can buy Shears of Amazon from anyone. If I open an account online, like Shardswab or eTrade or Bank of America, and I can buy stocks of Amazon. It's a publicly held. It means anyone can buy the stock. This is what publicly held is versus privately held. Now, what are the advantages and disadvantages of being a corporation? Well, the first advantage of being a corporation we talked about, it's a separate legal entity. It means the corporation and the individual that owns it, two separate legal entity, which in turn, it's gonna give you what's called the limited liability. What does limited liability mean? It means, let's go back to that deli. Let's assume you own that deli. Somebody walked in, they're ordering a hoagie, then they fell and they injured themselves. Guess what? If the deli is a corporation, the individual will sue the corporation. They cannot sue the individual. In other words, the maximum you would lose is whatever money invested in that corporation. Why? Because you sue the corporation, not the owners. The owners are separate entity. If that deli was not a corporation, it was a sole proprietorship, then the individual that fell and harmed themselves, they can go after this individual personally, and they can go after your personal assets, personal home, personal car, anything that you own. Another characteristic advantage of corporation is transferable ownership right. Simply put, if I have Amazon stocks, I don't like it. I can sell it, or if I want to buy it, I can buy it. So it's ease of ownership. Remember, let's talk about Wawa. Wawa, it's a private. There is an ease of ownership, but not that easy. If it's, let's go back to that restaurant business. Can you sell your business? Sure you can. But when you have a publicly large corporation, you have even easier transferable ownership rights. So it's easy, you can sell your assets, you can sell your stocks, your ownership very easily. Continuous life, corporation survived their owners. And a case in point is Steve Jobs and the Apple computer. So Steve Jobs passed away, unfortunately, but Apple computer did survive after Steve Jobs. So there's a continuous life of a corporation. No mutual agency for stockholders. This is important. No mutual agency. Simply put, although you own the stock, I own the stock of Amazon. Let's go back to Amazon. It's a good example. Actually, it's a good example. Let's assume, let's assume I do have few shares of Amazon. If I own Amazon stocks, I cannot contact Amazon and let them look. I own some stocks. I would like to make some deliveries for you. You can do that. You cannot be an agent of the corporation unless you work for Amazon. Although I own Amazon stock or some stocks in Amazon, I cannot act on behalf of Amazon. I don't have this agency power. There's no mutual agency. I cannot represent the company, which is better for me. I don't have to worry about it. Somebody else will have to worry about it. Easier capital accumulation, generally speaking, if you are a publicly traded corporation, large corporation, it's easier. It doesn't mean always easier, but generally speaking, it's easier to accumulate capital, to raise money. Why? Because you can ask anyone. If it's a public company, you can ask anyone. So those simply are some advantages of being a corporation. Some disadvantages are governmental regulation, especially the SEC, Securities and Exchange Commission. Once you are publicly traded corporation, the government is breathing down your neck. They're asking you for different reports, for different compliances. So you have extra cost, like especially when the internal controls rule came out, stocks 404, those are additional burdens for the company. And the reason they are additional burdens because they are corporation that are public. And what happened once you are public, the government regulates you. That's one, another disadvantage. Another disadvantage of corporation is corporate taxation. What is corporate taxation? Corporate taxation means the money is taxed twice. Let me explain. Let's assume as an individual, you don't have a corporation, you work a company and you make revenues of, let's keep it simple, 100,000 of revenues, 100,000 of revenues minus 40,000 of expenses, you made a profit of $60,000. Now what's gonna happen? As an individual, this $60,000 profit, it's gonna go to you and you'll pay taxes on this $60,000. Let's assume for simplicity, let's assume it's 20% of, oops, sorry. Let's assume 20% of $60,000, you'll be responsible for paying $12,000 in taxes. Let's now assume the same business except that you are a corporation. You see what's gonna happen. You made $100,000, you have expenses of 40, you have a profit of 60. Here's what's gonna happen first. Before you get the money, before you get the money, you have to pay taxes and let's assume it's 20% as well. So you're gonna pay 20% taxes and that's 20% is 12,000. Therefore, we're gonna take 60,000 minus 12,000. That's gonna keep you 48,000 in profit. Profit after court taxes, after the corporation paid the taxes. Now, here's what's gonna happen. I'm gonna change the pen again. Then this 48,000, it's gonna go to you. Then you're gonna have to pay taxes. So you're gonna have to take this 48,000, multiply it by let's assume you have to pay 15% taxes. So 0.15, you're gonna have to pay 7,200 in additional taxes. So what happened is the profit of 60,000 was taxed once and taxed twice. It's taxed two times. It's called double taxation. Now, in theory, this is what happened in practice. Companies, they'll try to get around this double taxation or they'll try to minimize it. This topic is beyond the scope of the scores but in my tax course, I do teach how, what you would do to avoid this double taxation. So this is another disadvantage. Now, who owns really the company and how does the company is run? Well, you have the shareholders. The shareholders are constantly changing. Some people sell their stocks, more people moved in but those are the owners, the shareholders. They are also shareholders are called investors. In other words, for shareholders, investors, owners, okay? Those are the people that invest money in the company. The stockholders are on the top of the pyramid scheme, basically they own the company and what they would do as a shareholder, you vote. You have the right to vote, which we're gonna take a look at the shareholders' right, but one of them is to vote. So what you do, these individuals vote for a board of directors, a group of people that they trust. They trust to run the company. This group of directors assign the president, vice president and other officers. Those individuals, they will hire employees and the employees would run the corporation on your behalf. Notice, no mutual, agency, say you own the company, you're at the top but you don't run the company. Now, I'm not saying you can't. As a stockholder, you can be part of the board. As a stockholder, you can be part of the management. As a stockholder, you could also be an employee but the point is just being a stockholder doesn't make you so. So I can own stocks in Amazon and work for Amazon. That's different, okay? I can own stocks in Amazon and vote myself on the board of directors. Yeah, right. I mean, you need billions of dollars to have saying in these large companies but the point is I'm just trying to make the point. So what are your rights as a stockholders? Because you're on the top of the pyramid scheme. I already told you, one of the right is the vote. Vote at meetings or register proxy votes. So some people, what they do, they ask you for their vote, they ask you. For example, if I have some five shares or 10 shares of Amazon, I might receive a letter from someone who's very active. They like, they care about Amazon and say, main store, would you mind transferring your right to vote for me? In other words, I fill out what's called register proxy vote and I assign my right, give them the right to vote on my behalf. So sometimes they do that or I can vote. I can obviously sell the stock. Obviously I can do that. That's one of my rights. The third right is purchase additional shares of stocks and this is called the preemptive right. And if you watch the Facebook movie, social network, I believe, that's what it's called, this was one of the issues for the whole movie. If you remember this guy here, if you ever watch the movie, if not, I strongly suggest you do watch it. If you remember this individual here and his friend Eduardo, the problem, this is obviously, this is a Zucumburg, Mark Zucumburg, the author of the book, Mark Zucumburg, the owner of Facebook. This was the issue between Mark Zucumburg, Facebook, and Eduardo where they, one way or another, they took the preemptive right. They took this right from Eduardo fraudulently and I don't remember the guy's name that was working with Mark Zucumburg. It's the guy that created Napster, Sean Parker and Sean Parker, maybe you don't remember what Napster is, but you can go a little bit of a search about it, it was played by Justin Timberlake. So what they did, they took away the preemptive right from Eduardo and basically they kick him out of the company or they gave him a small amount of shares. I strongly suggest you watch the movie if you're interested because it's good to see how companies start, they started from a dorm and now it becomes a humongous multi-billion dollar company. Also, you have the right to receive dividend, if any, we'll talk about dividend in the next few sessions. Dividend means if the company makes profit, if they decided to distribute shares to you, you can, you will get some of that dividend. You could also share in assets remaining after creditors are paid in liquidation. So in case the company go out of business, in case there was a liquidation, what's gonna happen, you receive some money, okay? But that's after the creditors are paid. So after the creditors are paid, whatever is left, you are the last in line. Really, you are the last in line and usually you don't get anything in case of liquidation. Now to own stocks, you have to own a stock. A stock is a piece of paper. For example, this is ownership of stock for the Green Bay Packers Inc. And in my classes, in my physical classes, when I go over this session, usually the next time, the next class, one individual comes with a Disney stock, they went to Disney and they bought one share of Disney stock, but this is the Green Bay Packers. So when you own stocks, you receive a piece of paper that looks like a stock, stock ownership. This was, used to be the case. Now when you buy stocks, you don't get one of those. It's a computer entry somewhere on a server. If you wanna get a stock certificate, most companies you have to pay for it now because it costs money to issue those stock certificate. But back in the old days, people did not have computers. So the only ownership proof that they own the stock is a piece of paper and make sure you don't lose it. Because if you lose it, you know, you lose it. You no longer have the stock, especially if you have not registered into your name. So each unit of ownership is called the share of stock and for each share, generally speaking, most of the time, one share equal to one vote. So what does that mean? It means the more shares you have, the more votes you have, okay? So your power is your money. Stock certificates serve as a proof that a stockholder has purchased the share. Again, that's old, old. I own stocks. I don't have any stock certificate whatsoever, okay? When the stock is sold, the stockholder signs a transfer endorsement. You don't do that anymore. You just click on the sell button on your computer and you sell it. Back in the old days, you'd have to endorse it. It's called a transferable, a piece of paper. It's a transferable asset, okay? So this is basically the characteristic of a corporation in the next session. I'll start to look at issuing common stocks. That's very important. As always, please like my recording, share them, subscribe. Visit my website for additional resources, especially if you want to supplement your accounting education or study for your CPA exam. Pass the exam, do good with your life. Get this exam behind you. Study hard and stay safe, especially during those coronavirus outbreaks.