UNDERSTANDING ACCOUNTING TALK 15: Directorships in Corporations
In the Balance Sheet of a corporation, Stockholders’ Equity (or Paid-Up Capital) is usually expressed as a number of shares of stock with each stockholder owning a definite number of stocks (recorded in a Stock & Transfer Book). Each share of stock has a stated par value; and the total number of shares multiplied by the par value is the corporation’s Paid-Up Capital.
At incorporation, the number of the members of the Board of Directors is fixed in the Articles of Incorporation. As a thumb rule, the total shares divided by the number of Directors as declared in the Articles is usually the minimum number of shares a particular stockholder should be holding (either owned or assigned by another stockholder) if he wants to be voted a Director.
In large corporations however, where shares are distributed among thousands of stockholders, the stockholders who hold a majority of the shares can control the election of Directors. Often, a majority stockholder uses his shares to get somebody who is not even a stockholder voted as a Director. In this case, the majority stockholder puts a qualifying share or number of shares in the name of his nominee (since only a stockholder can be voted a Director).
Only real individual persons can incorporate. Once incorporated, a corporation or any legal entity (a juridical person) can be a stockholder. The stockholder who owns the most number of stocks (and, therefore, can vote the most number of Directors who, in turn, choose the Officers of the corporation) can virtually run the corporation.
A proprietorship (whether sole or partnership) has none of these complexities.
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POSTED IN: Accounting Concepts, Accounting for NonAccountants, Equity / Capital
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