Matthew Mulatto and his brother John Mulatto plans to open a business. The major decision they face is how to organize the business. They expect to generate a massive profit during the first year. Although they have enough to start the business now as a partnership, they believe cash flow may be an issue as they grow. They believe that the corporate form of operation will be best option. They have hired you as a consultant and seek your advice.

Requirements:

1. Answer the following questions for the Mulatto brothers.

1. How are paid-in-capital and retained earnings:

• Similar?
• Different?

2. What are the main categories of paid-in capital?

3. When does a company declare a cash dividend?

4. Which characteristic of a corporation limits a stockholder's loss to the amount of his or her investment in the stock of the corporation?

5. What does the term par value of stock mean?