Corporations Structure & Financed Methods

Flashcards about the structure and financing of corporations.

What is a sole trader?

A business owned by one person, not a limited company, with unlimited legal liability for business debts.

What documentation is needed to legally establish a sole trader business?

No specific documentation is needed.

What is a partnership?

A business owned by two or more partners who may contribute capital and share in operations. Partners have unlimited liability for business debts.

What is a 'Partnership agreement'?

A document which sets out the rights of individual partners

What is a limited company?

A business with a separate legal identity from its owners (shareholders), who appoint directors to manage the company. Shareholders are liable only to the fully paid value of their shares.

What documents must limited companies have?

Memorandum of Association and Articles of Association

What is a Limited Liability Partnership (LLP)?

A business structure combining limited liability benefits with partnership characteristics. It's a separate legal entity with members' liability limited.

What documentation governs an LLP?

A partnership agreement that may already be in force within an existing partnership. It has no Memorandum or Articles of Associations.

How is an LLP taxed?

In the same way that conventional partnerships are taxed.

What is a public limited company?

A company with documentation stating it is public, having an issued share capital of at least ₤50,000, and its name ends with ‘public limited company’ or PLC.

What is a private limited company?

All other limited companies that are not public limited companies. A private limited company's name must end with the word ‘limited’ or the abbreviation Ltd and is not allowed to offer its share to the public.

What must a public limited company have in regards to shares?

It must have an issued share capital of at least ₤50,000

What are some advantages of limited liability for a company?

Easier to raise capital, allows large numbers of people to invest small amounts, and separation of ownership and management.

What are some of the cons of a Limited Company?

Trade creditors have no way of ensuring payment once company assets are exhausted and managers may have aims not in the best interest of the shareholders.

What is personal taxation typically levied on?

All of the financial resources of an individual such as: Income, Profit from operating as a sole trader or partner, Inherited wealth, Investment gains, Value of assets held

What is the purpose of taxing cashflows?

In many countries taxation is limited to cash flows, since these are indicative of cash being available to finance the tax payable.

What is done to ensure that citizens have sufficient retained income in wealth to meet their essential needs?

It is common to assess tax liabilities in arrears taking into account all relevant sources of wealth and/or income, and to exempt some basic levels of income or wealth from the calculations.

What is the general rule regarding revenue flows and taxes?

In general, governments will seek to ensure the revenue flows are taxed only once in the hands of the recipients

What are some examples of taxable income?

Income earned plus Income in kind plus Gross investment income less Tax-free income less Tax-free expenditure less allowance

What is subject to capital gains tax on chargeable gains?

Individuals are typically subject to capital gains tax on chargeable gains.

𝐶ℎ𝑎𝑟𝑔𝑎𝑏𝑙𝑒 𝑔𝑎𝑖𝑛

𝑠𝑎𝑙𝑒 𝑝𝑟𝑖𝑐𝑒 − 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑐𝑜𝑠𝑡

Why does a sale price reduce?

Sale price can be reduced to reflect any costs associated with the sale.

Why does a purchase cost increase?

Purchase cost can be increased by any costs associated with the purchase, and the expenditure made to enhance the value of the asset during the period the asset was held.

What can capital losses normally be offset against?

Capital losses can normally be offset against capital gains.

What are companies liable to on their taxable profits?

Companies are liable to corporate income tax (corporation tax) on their taxable profits.

What is the starting point for a company’s tax assessment?

The starting point for a company’s tax assessment is ‘profit on ordinary activities before taxation’

What is DTR?

DTR means that the local tax authority will allow companies and individuals with overseas income or capital gains to offset tax paid overseas against their liability to domestic tax on that income or capital gains.

What is 'Loan capital'?

A company issues loan capital to raise money from investors. In return, the company will pay the investor a stream of interest payments plus an eventual return of capital.

What rights do bondholders have?

The right of holders of loan capital will be set out in a loan agreement drawn up when the loan is issued.

Who is appointed to act on behalf of the loan stockholders?

A trustee is appointed to act on behalf of the loan stockholders.

What are debentures?

Loans which are secured on some or all assets of the company. There are specific secured assets mentioned in the legal documentation for the mortgage debenture.

What actions are available to the stockholders if the company fails to make one of the coupon payments or the capital repayment?

Appoint a receiver to intercept income from the secured asset(s) or Take possession of the secured asset to sell it in order to meet their debt.

What is the difference between mortgage debenture and a floating charge debenture?

Mortgage Debenture - There are specific secured assets mentioned in the legal documentation for the mortgage debenture. / Floating charge debenture - Can change the secured assets in the normal course of business.

What happens when a company fails to make an interest or capital payment with a floating charge debenture?

The debenture holders can apply to the courts to convert the floating charge to fixed charge.

With unsecured loan stock, is there a specific security for the loan?

There is no specific security for the loan.

What can loan stockholders do if a company fails to make payment when they are due?

If company fails to make payment when they are due, loan stockholders can apply to the courts to have the company wound up.

What is subordinated debt?

In the event of default, the holder of subordinated debt ranks below the firm’s general creditors (but ahead of preference shareholders and the ordinary shareholders).

What is Eurobond loan capital?

It is possible to arrange with investment banks for loan capital to be issued to investors without it coming under the legal or tax jurisdiction of any country. The market for this type of loan capital is known as the ‘Euro’ market.

What are Eurobonds?

‘Bearer-form’ documents which means that, to claim interest payments, holders must cut out coupons from the certificates and send them to the company (or it's paying agent).

What are floating-rate notes (FRNs)?

Medium-term debt securities issued in the Euro market whose interest payments ‘float’ with short-term interest rates, possibly with a stipulated minimum rate.

What rights do ordinary shares (Equities) give?

Ordinary shares give rights to a share of the residual profits of the company, and to the residual capital value if the company is wound up, together with voting rights and various other rights.

Shares that offer investors high potential returns for high risk, particularly the risk of capital losses

Ordinary shares

What is the difference between authorized and issued share capital?

Authorized share capital is the total nominal value of shares the company's documentation allows. The issued share capital is the nominal amount actually issued.

Compared to ordinary shareholders, what is similar about preference shareholders?

They do not usually carry voting rights.

Convertibles

Convertible forms of company securities are, almost invariably, unsecured loan stocks or preference shares that convert into ordinary shares of the issuing company.

Warrants

Call options written by a company on its own stock. When they are exercised, the company issues more of its own shares and sells them to the option holder for the strike price.

When obtaining a stock exchange quotation, what are quoted securities referred to as?

Listed securities

What is an advantage about having access to the company’s shares?

The fact that shares can be easily valued helps with inheritance and capital gains tax calculations.

Methods of Obtaining Quotation

Offer for sale at a fixed price, Offer for sale by tender, Offer for sale by subscription, Placing Introduction.

What is an offer for sale at a fixed price?

A predetermined number of shares (or other securities) is offered to the general public at a specified price

With an offer for sale at a fixed price, what is done rather than selling shares directly to the public?

The company or existing shareholders sell the shares to an issuing house. The issuing house is then responsible for selling shares to the public.

What is an offer for sale by tender?

Instead of inviting applications at a specified price, the issuing house invites members of the public to submit a tender stating the number of shares which they are prepared to buy, and the price which they are prepared to pay.

What is the issuing company when issuing shares by a subscription?

The issuing company bears (at least part of) the risk of undersubscription.

What is the first action done for Placings (or ‘selective marketings’)?

The issuing house first buys the securities from the company.

Introductions

Do not involve the sale of any shares. They simply mean that the existing shares will in future be quoted on the London Stock Exchange.

Underwriting

Arranging to sell all the shares at an agreed price to the issuing house. The company will pay the issuing house a fee.

Rights issue

Where a company offers further shares, at a given price, to existing shareholders in proportion to their existing holdings.

What is a rights issue when a company wants to raise more capital through a further issue of shares?

They are obligated to offer the new shares to the existing shareholders.

What is market capitalization?

𝑃 × 𝑛𝑢𝑚 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠

A scrip issue

Where the company gives free shares to all ordinary shareholders in proportion to their existing holding

A hire purchase agreement

An agreement to pay regular rental payments for the goods you hire and then to buy them at the end of the agreed period. Legal ownership passes to the buyer only when the final payment is made.

A credit sale

A normal sale of a good together with an agreement that payment will be made by a series of regular instalments over a set period of time. Legal ownership passes to the buyer at outset.

A lease

An agreement where the owner of an asset gives the lessee the right to use the asset over a period of time, in return for a regular series of payments. Legal ownership does not change hands.

Bank loan

A form of medium-term borrowing from a bank where the full amount of the loan is paid into the borrower’s current account and the borrower undertakes to make interest payments and capital repayments on the full amount of the loan.

An overdraft

A form of short-term borrowing from a bank where the borrower is granted a facility to draw money out of a current account such that it becomes negative, down to an agreed limit. The borrower pays interest only on the amount by which they are actually overdrawn. No explicit capital repayments are made.

Trade credit

An agreement between a company and one of its suppliers to pay for goods or services after they have been supplied.

Non-recourse factoring

Where the supplier sells on its trade debts to a factor in order to obtain cash payment of the accounts before their actual due date. The factor takes over all responsibility for credit analysis of new accounts, payment collection and credit losses.

Recourse factoring (or ’invoice discounting’)

Only provides early payment of invoices. It is a loan which is seemed against the invoices, and has a value which automatically fluctuates with the amount that the company sells.Credit risk remains with the original supplier.

What are bills of exchange known as?

‘two name’ papers because they carry both the name of the company which owes the money and the name of the accepting bank.

Commercial paper

A single name form of short-term borrowing used by large companies. It comes in the form of bearer documents for large denominations which are issued at a discount and redeemed at par.

Shadow banks

Non-bank financial institutions that carry out this banking activity outside the regulated system.

What is the difference between how shadow banks operate versus traditional banks?

Shadow banks do not take deposits but borrow short-term funds in the money market and lend or invest these funds over the longer term.

Project financing

Used in financing large infrastructure projects, often involving public- private partnerships (PPP) where the size of the capital required for the project is very large, often amounting to hundreds of millions of pounds.

Special Purpose Vehicle (SPV)

The financing vehicle of the project set up for the specific project and is the borrower, subcontracting the construction and operation contracts.

Crowdfunding

Enables a large number of participants, individuals or businesses, to support a business, project, campaign or an individual.

Microloans

Small loans that are usually easier and faster to secure than the traditional loans.

A futures contract

A standardised, exchange tradable contract between two parties to trade a specified asset on a set date in the future at a specified price.

Financial futures

Based on an underlying financial instrument, rather than a physical commodity.

What is margin in futures contracts?

Each party to a futures contract must deposit a sum of money known as margin with the clearing house.

For delivery, what does the contract require?

Physical delivery of a bond.

A forward contract

A non-standardised and privately negotiated contract between two parties to trade a specified asset on a set date in the future at a specified price.

An option

Gives an investor the right, but not the obligation, to buy or sell a specified asset on a specified future date.

What is a Swap?

A contract between two parties under which they agree to exchange a series of payments according to a prearranged formula

Interest rate swap

One party agrees to pay to the other a regular series of fixed amounts for a certain term. In exchange, the second party agrees to pay a series of variable amounts based on the level of a short-term interest rate. Both sets of payments are in the same currency.

A currency swap

An agreement to exchange a fixed series of interest payments and a capital sum in one currency for a fixed series of interest payments and a capital sum in another.

What is a sole trader?

A business owned by one person, not a limited company, with unlimited legal liability for business debts.

What documentation is needed to legally establish a sole trader business?

No specific documentation is needed.

What is a partnership?

A business owned by two or more partners who may contribute capital and share in operations. Partners have unlimited liability for business debts.

What is a 'Partnership agreement'?

A document which sets out the rights of individual partners

What is a limited company?

A business with a separate legal identity from its owners (shareholders), who appoint directors to manage the company. Shareholders are liable only to the fully paid value of their shares.

What documents must limited companies have?

Memorandum of Association and Articles of Association

What is a Limited Liability Partnership (LLP)?

A business structure combining limited liability benefits with partnership characteristics. It's a separate legal entity with members' liability limited.

What documentation governs an LLP?

A partnership agreement that may already be in force within an existing partnership. It has no Memorandum or Articles of Associations.

How is an LLP taxed?

In the same way that conventional partnerships are taxed.

What is a public limited company?

A company with documentation stating it is public, having an issued share capital of at least ₤50,000, and its name ends with ‘public limited company’ or PLC.

What is a private limited company?

All other limited companies that are not public limited companies. A private limited company's name must end with the word ‘limited’ or the abbreviation Ltd and is not allowed to offer its share to the public.

What must a public limited company have in regards to shares?

It must have an issued share capital of at least ₤50,000

What are some advantages of limited liability for a company?

Easier to raise capital, allows large numbers of people to invest small amounts, and separation of ownership and management.

What are some of the cons of a Limited Company?

Trade creditors have no way of ensuring payment once company assets are exhausted and managers may have aims not in the best interest of the shareholders.

What is personal taxation typically levied on?

All of the financial resources of an individual such as: Income, Profit from operating as a sole trader or partner, Inherited wealth, Investment gains, Value of assets held