ci 1: : Organizational Forms, Corporate Issuer Features, and Ownership

Table comparing sole proprietorship, general partnership, limited partnership and corporation for

1. owners

2. legal identity (separate or not)

3. mangement control

4. owner liability

5. taxation

6. access to financing

Feature	Sole Proprietorship	General Partnership	Limited Partnership (LP)	Corporation / Public Limited Company
Owners	Single owner	Two or more general partners	At least one GP + one or more LPs	Shareholders
Legal Identity	No separate legal identity	No separate legal identity	No separate legal identity	Separate legal entity
Management Control	Owner manages business	Partners jointly manage	GP manages business; LPs usually passive	Board of directors and professional managers
Owner Liability	Unlimited liability	Shared unlimited liability	GP: unlimited liability; LPs: limited liability	Limited liability for shareholders
Taxation	Pass-through taxation	Pass-through taxation	Pass-through taxation	Corporate taxation + possible dividend taxation (double taxation)
Access to Financing	Limited to owner’s resources	Limited to partners’ resources	Better than GP but still limited	Strongest access to capital markets

advantages and disadvantages of

1. sole proprietorship

2. general partnership

3. limited partnership

4. corporation/public limited company

	Sole Proprietorship	General Partnership	Limited Partnership (LP)	Corporation / Public Limited Company
Adv	Simplicity and full control	Shared expertise and resources	Limited liability for LPs	Scalability and broad financing access
Disadv	Unlimited liability and limited growth	Unlimited liability for all partners	GP still exposed to unlimited liability	Double taxation and greater regulation

What is the owner–manager separation in a corporation?

shareholders own the company; board and managers run it.

What characterizes a private limited company?

• Limited liability, shares

• separation of ownership and control

• restricted ownership transfer

• pass-through taxation in some jurisdictions

What activities are subject to regulation for corporations?

• Registration,

• reporting/disclosure,

• capital market activities.

Why are corporations subject to multiple jurisdictions?

depends on where

• company is incorporated,

• business is conducted, and

• company finances itself

What is the role of the shareholders, board of directors and management?

• Shareholders elect board of directors

• Board appoints executives (CEO etc.)

• Management runs operations and strategy

What is the CEO’s role in a corporation?

Executes investing, financing, and operating decisions on behalf of the board.

why may double taxation occur?

f the government taxes companies on their earnings and it taxes dividends (which are distributions of earnings to owners) as personal income.

what are the two different Sources of Corporate Finance

1. Equity financing

• Issuing shares

• Retaining earnings

2. Debt financing

• Loans

• Bonds

• Leases

Equity vs Debt Claims

Equity holders (shareholders):

• Receive dividends if declared

• Residual claim on profits

Debt holders:

• Receive fixed interest

• Must be repaid on schedule

Debt has priority over equity in liquidation

financial vs economic profit?

financial: Accounting profit after meeting fixed obligations (interest, taxes, etc.).

economic: Profit above the required return on equity (opportunity cost of capital)

How are public vs private companies commonly defined?

Based on whether their shares are listed and traded on a stock exchange.

• public shares a tradeable

• private shares need negotiation and approval

three main differences between private and public companies

1. the ability to transfer ownership between investors,

2. the process of issuing new shares, and

3. registration and disclosure requirements. 

What is free float?

The proportion of shares that are freely traded in the market (not held by insiders or controlling investors).

what are the three ways a private company can go public?

1. IPO

• first sale of shares to the public

2. direct listing

• does not involve an underwriter and no new shares are issued

• lists existing shares on an exchange at a price determined by the market,

3. SPAC

exists solely for the purpose of acquiring an unspecified private company sometime in the future

• raise capital

• can be disbursed only to complete an acquisition; otherwise, they must be returned to investors

• have finite time limit