Corporations:

Paid-in Capital

© Copyrright Doug Hillman 2000

 Corporation
 A group of persons authorized to act as
a separate legal entity
 Same privileges and responsibilities as
an individual
› Enter into contracts
› Sue or be sued
› Own, buy, and sell property

© Copyrright Doug Hillman 2000

 Organization of a Corporation
 Stockholders
 Board of Directors
 Management

© Copyrright Doug Hillman 2000

 Stockholders’ Right
 Vote at stockholder’s meetings
 Sell or dispose of shares of stock
 Participate in corporate profits by receiving
dividends when declared
 Maintain one’s percentage ownership
(preemptive right)
 Participate in distribution of assets on
liquidation

© Copyrright Doug Hillman 2000

 Advantages of Incorporation
 Ability to generate capital investment
 Ease of transfer of ownership
 Continuity of life
 Limited liability
 Professional management

© Copyrright Doug Hillman 2000

 Disadvantages of
Incorporation
 Cost of incorporation
 Increased regulation
 Double taxation
 Separation of ownership and
management functions

© Copyrright Doug Hillman 2000

 Overview of Stockholders’
Equity
 Paid-in capital
› Stock - par
› Excess over par or stated value
› Donations
 Retained earnings

› Undistributed earnings from

operations

© Copyrright Doug Hillman 2000

 Stock Terminology
 Authorized
› Maximum number of shares allowed by
charter
 Issued

› Number of shares transferred to stockholders

 Outstanding

› Number of shares currently in hands of

stockholders

© Copyrright Doug Hillman 2000

 Stock Terminology
 Par value
› Dollar amount assigned to each share of
stock by charter
 Stated value

› Dollar amount assigned to each share of

stock by board of directors
 No-par value

› Stock without a par value

© Copyrright Doug Hillman 2000

 Legal Capital
 Minimum amount of capital that must be
left in the corporation by actions of the
board of directors for protection of the
creditors
 Par-value - par value of issued shares
 Stated value - stated value of issued
shares
 No-par - total proceeds of stock

© Copyrright Doug Hillman 2000 1

 Classes of Stock
 Common stock
› Residual class of ownership
› Controlling owners
› Unlimited dividends
 Preferred stock

› Receive dividends before common

› Receive liquidation before common

© Copyrright Doug Hillman 2000 1

 Preferred Stock
 Stated dividend rate
› Percentage of par
› Dollar amount per share
 Cumulative

› Undeclared dividends accumulate

› Unpaid dividends are dividends in
arrears

© Copyrright Doug Hillman 2000 1

 Issuance of Stock
 Securities Act of 1933 requires stock
issued in interstate markets to be
registered with the SEC
 Announced in tombstone ad
 Advertising restricted to a book of facts
called prospectus

© Copyrright Doug Hillman 2000 1

 Issuance of Stock
 Proceeds increase assets
 Par or stated value increases stock
account
 Proceeds in addition to par or stated
value recorded in Paid-in Capital-Excess
Over Par(Stated) Value, class of stock

© Copyrright Doug Hillman 2000 1

 Disclosure of Paid-in Capital
Stock
Preferred stock, 10%, $10 par,
1,000 shares authorized,
800 shares issued $ 8,000
Common stock, $1 par, 10,000
shares authorized, 6,000
shares issued 6,000
Total stock $14,000

© Copyrright Doug Hillman 2000 1

 Disclosure of Paid-in Capital
Additional paid-in capital
Paid-in capital-excess over par,
preferred $20,000
Paid-in capital-excess over par,
common50,000
Paid-in capital-donated land 14,000
Total additional paid-in capital $84,000
Total paid-in capital $98,000

© Copyrright Doug Hillman 2000 1

 Analyzing Information
 Total number of shares authorized
 Total number of shares issued
 Total number of shares outstanding
 Total market value of shares
outstanding

© Copyrright Doug Hillman 2000 1