Initial Acts of Corporation.—When the corporation is ready to commence business, its first act is usually to call a meeting of the incorporators and directors for the purpose of adopting a set of by-laws—although this matter may be delegated to the board of directors. This meeting also authorizes the issue of stock at or above par in exchange for cash, labor, or property.
State Control.—The outside control of the corporation is vested in the state. The state constitution, the general corporation law, the statutes relating to business organizations in general, and the specific contract between the corporation and state embodied in its charter or certificate of incorporation—these form the basis for state control and the limits within which the corporation may act as an authorized person. If the corporation does an interstate business, it is subject also to the regulations of the Interstate Commerce Commission.
Working Organization and Management.—The corporation’s owners, that is, the stockholders, are the source of all authority and control. Unlike the partnership where control and voice in the management are equally shared by the partners regardless of any inequality in their investments, the corporation ownership is evidenced by shares of stock and each share is given one vote. Thus each owner’s authority and voting power are dependent upon the amount of his ownership of stock. He has, however, the right to delegate this power to another person by “power of attorney,” and in this way it frequently happens that one stockholder exercises a power far beyond the amount of shares owned by him. Delegation of voting power frequently occurs when the stock is widely distributed geographically and is owned in small lots. In theory the agent or attorney entrusted with the voting power of others is simply carrying out the will of his principal, the real owner of the stock.
Annual Election of Directors.—Because of the number of stockholders and because many of them are engaged in other pursuits, one of the characteristics of the corporate form of management is that the owners frequently do not have direct control of their enterprise. Accordingly, at regular times, usually annually, the stockholders elect directors to whom are delegated the general oversight and control of the business. The board of directors thus elected stands in the place of the stockholders during the period between the annual meetings at which it renders account of its management.
Officers.—The board of directors elects officers of the company—usually a president, vice-president, treasurer, and secretary—to undertake the active management of the business; or the directors may appoint a general manager or superintendent on whom rests the active management and who is the executive head of the corporation. Thus the chief characteristic of the working organization of the corporation is the delegation of authority to a responsible head. The accountability of the officers to the board of directors, and of the directors to the stockholders, has so far proved the most efficient method of conducting modern business.
The Showing of Proprietorship.—The chief difference, from an accounting viewpoint, between the corporate form and other forms of business organization is in the showing of proprietorship. Vested proprietorship in a sole owner or partnership business is carried under the title of the different owners’ capital accounts, and credit is extended by the public to such owners, not on the basis of what the particular business is worth, but on the reputation of the owners and what they are known to be worth outside the business as well as in the business. On the other hand, the law has relieved the owners of a corporation of individual liability for the debts of the corporation. Only the corporate property can be held liable for the satisfaction of creditors’ claims. For their protection, the corporation is not allowed to impair its capital stock by the payment of any portion of it in dividends to the owners or to change the amount of its capital stock without special authority. The outstanding capital stock, in theory, represents to the prospective creditor the minimum value of the corporation assets which are supposed to be sufficient to meet in full the claims of creditors. Accordingly, the portion of the capital of a corporation represented by its capital stock is a fixed amount, and the increments or decrements of proprietorship are usually shown in a separate account called Surplus. This account must always be read with the Capital Stock account to ascertain the current or present capital as distinguished from the original.
The Surplus account is sometimes divided and shown under such titles as Profits, Reserves, Undivided Profits, Working Capital, etc. To ascertain full proprietorship or net worth, all such accounts must be included.
Records Peculiar to a Corporation
The Subscription Book and Subscription Ledger.—Upon the proper filing and acceptance of the certificate of incorporation, authority is given the incorporators to secure subscriptions to the capital stock. Subscription books or blanks may then be opened, which usually contain a form of agreement somewhat as follows:
We, the undersigned, do hereby subscribe for and agree to take the number of shares of the capital stock of the Blank Company, par value ........ set opposite our names and pay for the same, ........ per centum down, the remainder subject to the call of the board of directors.