SOURCES OF PAID-IN CAPITAL
The managers of a corporation are responsible for establishing the capital structure of
a company. The capital structureof a company is the percentage of total assets that is
financed by creditors, as discussed in the previous chapter, and the percentage that is
financed by owners. The financing from owners comes from two main sources of
stockholders’ equity: (1) paid-in capital (or contributed capital) and (2) retained earn-
ings. The main source of paid-in capital is from issuing stock, which we will discuss
in the next sections.Common Stock
When only one class of stock is issued, it is called common stock. In this case, each
share of common stock has equal rights. The major rights that accompany ownership
of a share of stock are as follows:- The right to vote in matters concerning the corporation.
- The right to share in distributions of earnings.
- The right to share in assets upon liquidation.
The distribution of earnings is called a dividend. The board of directors
of a corporation has the sole authority to distribute dividends to the
stockholders. When such action is taken, the directors are said to de-
clare a dividend. Since dividends are normally based on earnings, a
corporation cannot guarantee dividends. For example, CIGNA Corp.,
a major insurance company, recently slashed its dividend by 90% due
to financial constraints.
The shares of a company can be categorized as follows:- Authorized:The amount of shares available to be issued as stated
in the corporate charter. - Issued:The actual amount of shares that have been sold to
shareholders. - Outstanding:The issued shares, less the amount of previously is-
sued stock reacquired by the company, that are remaining in the
hands of shareholders.
The relationship between authorized, issued, and outstanding stock
is shown in the graphic at the left.496 Chapter 11 Stockholders’ Equity: Capital Stock and Dividends
List the major sources of
paid-in capital, including
the various classes of
stock.2
Significant costs may be incurred in organizing a corporation. These costs include
legal fees, taxes, state incorporation fees, license fees, and promotional costs. Such costs
are recorded as an expense for the period incurred.Not-for-Profit, or Not?
Corporations can be formed for not-for-profit purposes by mak-
ing a request to the Internal Revenue Service under Internal
Revenue Codesection 501(c)3. Such corporations are exempt
from federal taxes. Forming businesses inside a 501(c)3 ex-
empt organization that competes with profit-making (and hence,tax-paying) businesses is very controversial. For example,
should the local YMCA receive a tax exemption for providing
similar services as the local health club business? The IRS is
now challenging such businesses and is withholding 501(c)3
status to many organizations due to this issue.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS
AuthorizedAuthorized
IssuedIssued
OutstandingOutstanding
Number of shares authorized, issued,
and outstanding