 Hello, and welcome to the session in which we would look at accounting for corporation. Basically, when we need to run a business, we can run it in many different format such as sole proprietary ship. It means one individual runs the company. So, sole means one, one person runs the company, or we can run a business through a partnership. Partnership needs at least two plus. You could have more than two, but at least two individuals to run the partnership. Now, we have many types of partnerships. We have what's called a general partnership. We have limited partnership. We have other types of partnerships. Just know that partnership is more than one, and we could have many types of partnerships. Now, different partnerships will give you different types of liability protection, different types of taxation, but that's not the topic for this session. If you want to learn more about partnership taxation, please go to Fahath Lectures, and I do have this topic covered in details. Corporation. Specifically, in this session, we'll focus about corporation, and specifically, we're going to be looking at C. C as in Charlie Corporation, not S Corporation, because S Corporation, when we talk about S Corporation, S Corporation is a hybrid between a corporation and a partnership. So, it has some feature of a corporation, some feature of a partnership. Once again, S Corporation topic is covered in my income tax course on my website, rather than this session focus on C, C as in Charlie. In most large corporations are C corporations. So, S Corporation is not really a true corporation. C corporations, we need to discuss three topics about corporation. So, every time I mentioned the word corporations in this session, I am referring to C, and I put C in capital here to remind you, this is a C and not an S. The first thing we need to discuss is the state corporate law. Second is the stock share system for a corporation. And third is a variety of ownership in a corporation. First is state law. How do a corporation start? Well, simply put, you might be running a business, for example, Fahath Lectures. I started my YouTube channel. Then I decide to incorporate. What do I have to do? I have to file paperwork. I have to tell a certain state, for example, the state of Delaware, this is where I am incorporated, that I would like to become a corporation. So, I will start by submitting what's called articles of incorporation to the state in which I desire to incorporate in. What do I submit? Well, there's a specific form. Well, I'll have obviously my name, the purpose of my business. I'm the only shareholder, but we could have many shareholders, but I'm the only shareholder now. If there's any officer, officers of the company, any information, the address, any additional information that the state would require. Once they receive this paperwork, the state would issue what's called a corporation charter. At this point, once they do so, the corporation itself becomes a legal entity, a legal person. An illegal person means what? It means the corporation can sue other party. It means the corporation can be sued. In the eyes of the law, the corporation becomes an individual. Now, just want to let you know, 50% of U.S. corporations are located in Delaware. Why? Well, because they have a favorable tax treatment and some favorable regulatory treatment as well, but mainly favorable tax treatment. Corporations don't pay income taxes in Delaware and that's why they incorporate there. Bear in mind that each state, because we are dealing with the state, has its own business incorporation act. What does that mean? It means accounting for stockholders' equity will differ, might differ from state to state, because assets liabilities, basically, they are common across the board. But when it comes to equity, states, they might use different language, different meaning to the language. So what happened is many states, they adopted the principle contained in the model, business corporate act prepared by the American Bar Association, just to be, to have some sort of a uniform measure, but not all states, many states. And that's why in an accounting course, we don't focus on that. So what happened sometime is terms might differ from state to state. For example, some state use par value stock, some state uses stated values, stated value, so on and so forth. And they mean different things under different states. Again, we don't discuss this in an intermediate accounting course or a financial accounting course for financial accounting purposes. The next thing we're going to look at is right of stockholders. What type of rights do stockholders have? Before we discuss the rights of stockholders, I would like to remind you whether you are a student or a CPA candidate to take a look at my website, farhatlectures.com. 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Connect with me on Instagram, Facebook, Twitter and Reddit. So what are some of the rights of the stockholders? One is the shareholder will have the following right absent of any restrictive provisions. For example, Facebook shares, they might have some restrictive provision. We'll talk about this in a moment. One, you can share in profit and losses proportionally to your ownership. What does that mean? It means if you own 10% of the company stocks, you'll get 10% of the profit. Two, voting right. Voting right gives you the right to elect the board of directors who are really in charge of the company who run the company. Also voting rights, it's proportionally to your ownership level unless there is some sort of a restrictive provision. Let me explain to you. For example, a company like Facebook. Facebook, they have class A stock and class B stock. Class A, if you own one share, you have one vote. And that's the general rule. One share, one vote. Class B, if you own one share, it will give you 10 votes. And class B is owned by Zuckerberg in management. So there's some sort of a restrictive provision. But in the absence of that, most companies, the majority of companies will give you one share, one vote. Google, they have another structure. They also have Google, GOOG and Google site GOOL. One of them has voting right. The other one does not. But most other companies, in the absence of any restrictive provision, one share equal to one vote. Also, in case of liquidation, you share proportionally in the asset liquidation. For example, again, if you own 10%, after the company liquidate, before they go out of business, whatever is left, you'll get 10%. Now bear in mind, you're lost online. So often time, there's nothing left. Also, one of the rights of the stockholders is the preemptive right. Also, we go back to the Facebook. And if you watch the movie, Social Network, how Facebook was found, this was one of the issue between Mark Zuckerberg and the co-founder. The co-founder was basically cheated from his shares by not giving him the preemptive right. Again, watch the movie, Social Network, and I think you should, if you haven't watched it. So what is the preemptive right? The right to purchase newly issued shares in proportion to your current ownership. Let's assume the company currently have 10,000 shares and you happen to own, let's assume 1,000 to keep it simple. Right now you own 10% of the company. Now the company decided to issue new shares. The company wants to expand and now they want to sell new 10,000, let me put it plus, plus 100,000 new shares. Those are new shares. Okay. So now they're going to have 110,000 in total. Here's what's going to happen. If you have 1,000 shares now and the company is issuing 10,000 shares, the first thing they have to do, they have to offer you, they have to offer you 10,000 shares. Why 10,000 shares? Because 10,000 shares is 10% of the new total. So if you buy the 10,000 shares, you're going to own 11,000 shares and 11,000 divided by 110 will keep your ownership at 10%. So as a current owner, you have the right, the preemptive right to be offered 10,000 of the new shares. Now whether you want to buy them or not, that's a different story. But if you decide to buy them, you're going to keep your current ownership. If not, if you decide to pass and you keep 1,000 shares, well, your ownership will drop below 1%. You're going to be less than 1% because 1,000 divided by 110 is less than 1%. So that's what the preemptive right is. And that's what they did in the movie. They took away the co-owner preemptive right by issuing new shares and they dropped his ownership, I believe, from 18% to, I believe, less than 1% or around 1%. I don't remember the exact percentage. Watch the movie. Also, you have the right to sell your shares. Of course, you might think, well, that's right, I should have. Well, that's not always the case. Sometime you might have some restrictive provision, but as a current shareholder, common shareholder, you have the right to sell your shares. And what happened? Because you have the right to sell your shares. Corporation, they have registrars and transfer agent. And what they do, these two companies, they keep track of transferring stocks because stocks transfer hands all the time on a daily basis. And as a result, when the company pays dividend, they need to know who owns the stock so they will send them the money. So they will have those registrar and transfer agent keep in track of the ownership. There are a variety of ownership interests. In this session, we're going to keep it simple. We're going to break down the ownership interest into common stock and preferred stock. Although I just told you a minute ago that, for example, common stock, you could have class A, you could have class B, you could have class C. So you could have many types of ownership structure, but we're going to keep it simple for education purposes, for intermediate accounting, for the CPA exam, as you either have common stock or preferred stock. Just in the real world, that's not the case. The common stock are the true owners of the company. Now, when we say stocks, when people talk about stocks, they usually refer to common stock, although they don't mention the word common, but this is what we imply, common stock. Those are the true owners of the company. Why? Because they can simply vote. Again, unless it's a Facebook company or it's some sort of a Google, there's a specific provisions, you have the right to vote. Also, as an owner, you bear the ultimate risk of loss. Well, guess what? If the company goes down, you're going to go down with the company. But also, you receive the benefit success. If the company does well, you enjoy that profit. So you have both. Also, you would receive dividend only if declared, and I emphasize if declared. As a shareholder, you don't have the right to receive dividend. If the company decided to pay dividend and you happen to own the stock at that point, you will get your share. So there is no guarantee in terms of dividend and no guarantee in case of liquidation. If the company goes out of business, close their door. Whatever the reason is, guess what? You might be out of luck. And basically, the common stock represent residual corporate interest. Residual corporate interest means whatever is left after the company pays off its liability is the common stock, the shareholders' equity. Now, preferred stocks are not really owners of the company. Why? Because they cannot vote. That right is taken away from them. They're stripped from that right. Now, hold on a second. Why would you buy then preferred stock if you cannot vote? Well, you might have other features. It's a contrite base. So the preferred stock could have any features you want to, but you cannot vote. For example, you have dividend preference. And that's the most important part for shareholders that own preferred stock. They have a preference over dividend. So when the company pays dividend, and we're going to talk in details about preferred dividend as well as dividend itself, I'm sorry, about preferred stock and dividend in future recordings, as well as if you go to my website, I do have those recordings. But the point is you have preference in term of dividend. So when the company pays dividend, first the money will have to go through the preferred stock. Then whatever is left goes to the common stock. So they get their money first. And preferred dividend comes in a lot of different flavors. We'll talk about that later. And usually the dividend is a stated rate or a dollar amount. Stated rate means the stock will have a $100 par value, 6%. It means they're going to pay you $6, 6% times 100. Or they will say it's a $100 par value, $3 dividend stock. Therefore, they will pay $3 per share. So the rate of the preferred is stated. Again, there are many form of preferred stock. We'll talk about those in a separate recording. They have also priority in case of liquidation. So in case of the company goes out of business or they're closing, they have a priority simply over the common stockholders. Not that much better priority, but it's before the common stockholders. And simply put, because of those reasons, it's a less risky than common stocks. It's less risky than common stock. So what should you do now? You should go to my website, farhatlectures.com and work multiple choice questions, MCQs on farhatlectures.com. At the end of this recording, I'm going to remind you whether you are a student or a CPA candidate. Invest in yourself, invest in your career. The CPA exam is worth it. I give you access to thousands of multiple choice through false lectures, organized by chapter, organized by CPA course. Study hard. Good luck. And of course, stay safe.