Alternative Forms of Ownership (3)
Posted on November 30, 2008 - Filed Under Finance
- A claim on the residual earnings of the firm. A corporation sells products or services and realizes revenues from the sales. To produce these revenues, the corporation must incur expenses for materials, labor, insurance, debt capital, and so on. Any excess of revenues over expenses—the residual earnings—belong to the shareholders of the business. Often, a portion of these earnings are paid out in the form of dividends, which are merely cash payments to stockholders, or stock repurchases, in which the company buys back shares held by stockholders. However, management typically elects to reinvest some (or all) of the residual earnings in the business, which presumably will produce even higher payouts to stockholders in the future.
- A claim on liquidation proceeds. In the event of bankruptcy and liquidation, shareholders are entitled to any proceeds that remain after all other claimants have been satisfied.
In summary, there are three key features of investor-owned corporations. First, the owners (the stockholders) of the business are well defined and they exercise control of the firm by voting for directors. Second, the residual earnings of the business belong to the owners, so management is responsible only to the stockholders for the profitability of the firm. Finally, investor-owned corporations are subject to taxation at the local, state, and federal levels.
Taken From : HEALTHCARE FINANCE
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