Question: Many businesses need amounts of capital that cannot be easily provided by a proprietorship. These businesses choose to organize using another form of business. An organization with the legal rights of a person and which many persons may own is called a corporation. A corporation is formed by receiving approval from a state or federal agency. Each unit of ownership in a corporation is called a share of stock. Total shares of ownership in a corporation are called capital stock. An owner of one or more shares of a corporation is called a stockholder. A corporation is a business organization that has the legal rights of a person. A corporation can own property, incur liabilities, and enter into contracts in its own name. A corporation may also sell ownership in itself. A person becomes an owner of a corporation by purchasing shares of stock. The principal diff erence between the accounting records of proprietorships and corporations is in the capital accounts. Proprietorships have a single capital and drawing account for the owner. A corporation has separate capital accounts for the stock issued and for the earnings kept in the business, which will be explained in more detail in Chapter 16. As in proprietorships, information in a corporation's accounting system is kept separate from the personal records of its owners. [CONCEPT: Business Entity] Periodic fi nancial statements must be sent to the stockholders of the corporation to report the fi nancial activities of the business.
Critical Thinking
1. The names of many corporations include the words Corporation, Incorporated, Corp., or Inc. in their names. Based on their names, identify several corporations in your area.
2. Why do you think many very large companies are organized as corporations?