on 26-Feb-2025 (Wed)

The corporate organizational structure is the only organizational struc- ture subject to double taxation.

However, the U.S. Internal Revenue Code allows an ex- emption from double taxation for “S” corporations, which are corporations that elect subchapter S tax treatment. Under these tax regulations, the firm’s profits (and losses) are not subject to corporate taxes, but instead are allocated directly to shareholders based on their ownership share. The shareholders must include these profits as income on their individual tax returns (even if no money is distributed to them). However, after the share- holders have paid income taxes on these profits, no further tax is due.

Taxation of S Corporation Earnings Problem Rework Example 1.1 assuming the corporation in that example has elected subchapter S treat- ment and your tax rate on non-dividend income is 35%. Solution In this case, the corporation pays no taxes. It earned $8 per share. Whether or not the corpora- tion chooses to distribute or retain this cash, you must pay 0.35 *$8 =$2.80 in income taxes, which is $0.40 lower than the $3.20 paid in Example

The government places strict limitations on the qualifications for subchapter S tax treat- ment. In particular, the shareholders of such corporations must be individuals who are U.S. citizens or residents, and there can be no more than 100 of them.

That is, in a corporation, direct control and ownership are often separate. Rather than the owners, the board of directors and chief executive officer possess direct control of the corporation.

The shareholders of a corporation exercise their control by electing a board of directors, a group of people who have the ultimate decision-making authority in the corporation.

When one or two sharehold- ers own a very large proportion of the outstanding stock, these shareholders may either be on the board of directors themselves, or they may have the right to appoint a number of directors.

The chief executive officer (CEO) is charged with running the corporation by instituting the rules and policies set by the board of directors.

The most senior financial manager is the chief financial officer (CFO), who often reports directly to the CEO

Within the corporation, financial managers are responsible for three main tasks: making investment decisions, making financing decisions, and managing the firm’s cash flows.

The financial manager’s most important job is to make the firm’s investment decisions. The financial manager must weigh the costs and benefits of all in- vestments and projects and decide which of them qualify as good uses of the money stock- holders have invested in the firm. These investment decisions fundamentally shape what the firm does and whether it will add value for its owners.

Once the financial manager has decided which investments to make, he or she also decides how to pay for them. Large investments may require the corporation to raise additional money. The financial manager must decide whether to raise more money from new and existing owners by selling more shares of stock (equity) or to borrow the money

Signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act brought a sweeping change to financial regulation in response to widespread calls for financial regulatory system reform after the near collapse of the world’s financial system in the fall of 2008 and the ensu- ing global credit crisis.

Implementing the wide-ranging financial reforms in the Dodd-Frank Act required the work and coordination of many federal agencies, either through rulemaking or other regulatory actions. By mid-2018, just over two- thirds of the rules had been finalized. But as the financial crisis has faded from memory and political priorities have changed, there is increasing pressure to roll back many of the Dodd-Frank reforms. For example, small- and medium-sized banks have been exempted from many of the Act’s regulations, and the Consumer Financial Protection Board, which was created by the Act, has sharply curtailed its activity under new leadership. Finally, significant changes to the “Volcker rule,” which bars banks from engaging in speculative trading, are being con- sidered by the Federal Reserve.

The financial manager must ensure that the firm has enough cash on hand to meet its day-to-day obligations. This job, also commonly known as managing working capital, may seem straightforward, but in a young or growing company, it can mean the difference between success and failure. Even companies with great products require significant amounts of money to develop and bring those products to market. Consider the $150 million Apple spent during its secretive development of the iPhone, or the costs to Boeing of producing the 787—the firm spent billions of dollars before the first 787 left the ground. A company typically burns through a significant amount of cash developing a new product before its sales generate income. The financial manager’s job is to make sure that access to cash does not hinder the firm’s success.