The disadvantages also have been touched upon. They are here briefly summarized.

as a

(1) Government regulation. The corporation as creature of the state is subject to constant regulation. This in itself would not be a serious disadvantage were it not for the fact that at practically every session of the state legislature existing laws and regulations are changed, or entirely new ones adopted. The policy of states in this respect shifts from laxity to aggressive regulation and restriction according to prevailing public sentiment. Hence, it is impossible to forecast from one year to the next what these regulations will be.

(2) Greater burden of fees and taxes. The corporation must pay to the states in which it operates and to the federal government many kinds of taxes and fees from which the personal ownership types of organization are exempt. Not least among these is the initial expense of the organization tax and the annual franchise tax which it must pay to continue its existence.

(3) Restricted sphere of activity. The corporation may do only those things that it is specifically authorized to do, while the entrepreneurs in the personal ownership organizations may do anything that is not specifically prohibited. The former operates by permission and the latter by right. (4) Limited credit. In theory the limited liability enjoyed by the stockholder of a corporation should work to restrict the credit that may be extended to the corporation to an amount determined very largely by the selling value of the assets or the capitalized net earnings. Other things being equal, the same business, where operating under a corporate form, should not enjoy the same high credit standing that it would have as a partnership. But in practice, this theory does not always hold; and frequently, in spite of the limited liability, the corporation has a better credit standing than a partnership would have.

This is more particularly true of corporations operating large undertakings whose bond issues often exceed the selling value of the properties under their control. For example the old United States Shipbuilding Company issued $24,500,000 in bonds against assets valued at less than $16,000,000.3

3 Dewing, Corporate Promotions and Reorganizations.

CHAPTER VIII

CORPORATE SECURITIES AND CAPITALIZATION

THE CORPORATE SECURITIES

General. The corporate securities, like all types of securities, are of two general classes, namely, those that represent an ownership interest in the business, and those that represent a creditor's interest. The former are called stocks and the latter notes and bonds. Of each class, there are numerous kinds exhibiting all shades of characteristics that permit of gradual gradation from stocks to bonds; but there is, nevertheless, a fairly well recognized line of cleavage between them.

Capital Stock. - The number of shares of stock that the charter authorizes the corporation to issue is its capital stock. It is usually expressed in terms of money, in which case the charter will further state the number of shares into which it is divided. Thus we find in the charter of the Midvale Realty Corporation the following clauses:

"Third. The amount of capital stock of said corporation shall be One Million Dollars ($1,000,000).

Fourth. The number of shares of which said capital stock is to consist shall be Ten Thousand (10,000) shares of the par value of One Hundred Dollars ($100) each."

Such shares are said to have a par value, that is, a nominal value assigned to each share. A common practice is to assign a par value of $100 to each share, but this is a matter of choice within the limits fixed by provisions of law. The shares of stock of the Pennsylvania Railroad

have a par value of $50, while those of the Carnegie Steel Company were $1,000 each. Under the laws of the state of New York the par value must be $5, or multiples of that figure, which permits of considerable variation in this matter. Other states permit of the issue of stock of a nominal par value; for example, the Wind River Refining Company, a Maine corporation, has a share with a par value of only one mill.

In many of the states it is now permissible under statute law, to state in the charter merely the number of shares of which the capital stock is to consist, without assigning to each share any par or nominal value whatever. These shares are known as shares without par value, or non-par value shares. A good example of such a law is that of New York. This type of share is rapidly gaining favor, for, as one writer puts it, "It is argued that such shares lacking the 'price ticket' of a nominal value, will force the investing public to investigate the real value of the enterprise and the real probability of profits, and thus determine the real value of the shares much more surely and quickly than under the present system of valued shares." In most states, the incorporators are not restricted to the exclusive use of either the one type or the other, but may use both.

Issued and Unissued Stock. The stock of the corporation does not, merely by virtue of a charter provision authorizing it, exercise an effective claim on the income of the corporate business. To do so it must be sold by the corporation, or be given in exchange for services or property. By this means does the corporation make connection with entrepreneurs who are called stockholders. The stock that is so given out by the corporation is called issued stock, while the bal

1 Thomas Conyngton, Corporate Organization and Management, p. 70.

ance of the authorized capital stock is unissued. The United States Steel Corporation began life with an authorized capital stock of $1,100,000,000; and at the end of the first year had issued $1,018,583,600, the difference being unissued. The unissued stock forms a reserve which may be sold on the market to secure additional funds or may be otherwise disposed of as the stockholders may see fit, so long as they remain within the law.

The Stock Certificate. The instrument that is placed in the hands of the stockholder as an evidence of his ownership of issued shares of stock is the stock certificate. It usually sets forth the name of the corporation, the state of incorporation, the authorized capital stock, the par value of the shares, the name of the holder, the number of shares represented by the certificate, requirements as to transfer of ownership, the date of issue, the number of the certificate and the signatures of such officers of the corporation as may be required by the charter or by-laws. If the stock possesses any special feature, these are usually also printed on the face of the certificate. On the back of each certificate is a form to be filled in to effect a transfer of ownership.2

Full-Paid and Part-Paid Stock. If the corporation, in exchange or payment for its stock, has received money, property or services whose fair market value, in the best judgment of the directors, equals the face value of the stock, then the stock is said to be full paid. The corporation ordinarily also gives up any privilege it might have of levying assessments upon the stockholder in case it gets into difficulties. Most stock is issued as full paid and nonassessable, by virtue of which the stockholder's liability toward the corporation will have been satisfied in full. It frequently happens, however, that stock is issued as full paid and non-assessable, when in fact the corporation may

2 See Forms 21-24, Part VI.