Corporate Issuers Notes

Organizational Forms, Corporate Issuer Features, and Ownership

  • Learning Outcomes

    • Compare organizational forms of businesses
    • Describe key features of corporate issuers
    • Compare publicly and privately owned corporate issuers

  • Introduction

    • This learning module introduces Corporate Issuers, covering how corporations are organized, governed, and make decisions. Corporate issuers are the largest type globally; many analysts focus on their debt or equity instruments.

  • Legal Organizational Forms of Businesses

    • Businesses are legally organized as sole proprietorships, partnerships, or limited companies, differing in legal identity, owner-manager relations, liability, taxation, and financing access.
    • Organizational forms are jurisdiction-specific with a focus on common characteristics.
    • Exhibit 1: Organizational Forms of Businesses
      • Businesses
        • Sole Trader or Sole Proprietorship
        • Partnership
        • Limited Company
      • Non-Profits
      • Governments

  • Attributes of Organizational Forms

    • Legal Identity: Whether the business is legally a separate entity.
    • Owner-Manager Relationship: The relationship between owners and managers.
    • Owner Liability: The extent to which owners are personally liable.
    • Taxation: How business profits or losses are treated for tax purposes.
    • Access to Financing: The ability to raise capital.

  • Sole Trader or Proprietorship

    • Simplest form; the owner provides capital, controls management, and retains full financial returns and risks.
    • Often the default form, requiring no formal legal registration; dissolves when the owner ceases business or dies.
    • Exhibit 2: Sole Trader or Proprietorship
      • No formal legal registration needed in some jurisdictions.
      • Owner provides capital and exercises full control, participating fully in financial returns and risks

  • Partnerships

    • Allow multiple owners to pool resources and share business risk and return.
    • Three common types: general, limited, and limited liability partnerships.
    • A general partnership has two or more owners called partners or general partners
    • Exhibit 3: General Partnership
      • Have two or more owners called partners or general partners (GPs)
      • Like sole proprietorships, with the sharing of risk and return
      • Often governed by a written partnership agreement

  • Limited Partnership

    • Requires at least one general partner (GP) with unlimited liability who often manages the business.
    • Limited partners (LPs) have limited liability and may not have management responsibilities.
    • Exhibit 4: Limited Partnership
      • Must be at least one general partner (GP) with unlimited liability who often manages the business
      • Remaining partners (LPs) have limited liability and may not have any management responsibilities
      • Financial risk and reward are shared, managerial responsibilities are usually granted to the GP

  • Limited Liability Partnership (LLP)

    • Does not require a general partner; composed entirely of limited partners.
    • All partners have limited liability and share management responsibilities, appointing managing partners.

  • Limited Companies

    • Resemble limited partnerships but offer more features for accessing financing and expertise.
    • Two types: private and public limited companies.

  • Private Limited Company

    • Includes limited liability for all owners.
    • Ownership is divided into shares, which are easily tradeable.
    • Known by different names, including Limited Liability Company, S Corporation, G.K., SARL, GmbH.

  • Public Limited Companies (Corporations)

    • No legal restrictions on the number of owners or ownership transferability.
    • Features limited liability and separation of ownership and management.
    • Most suitable form for companies seeking to go public.
    • Business income is taxed at the business level and again at the personal level if profits are distributed.
    • Most suitable for companies intending to retain profits to fund investment.

  • Exhibit 5: Organization of Limited Company

    • Shareholders elect Board of Directors, appointing executive management to operate the company.

  • Exhibit 6: Features of Sole Proprietorships, Partnerships, and Corporations

    • Comparison of legal identity, owner operator relationship, owner liability, taxation, and access to financing for each type

Key Features of Corporate Issuers

  • Introduction

    • Explore the features of corporations and their advantages over other organizational forms such as limited owner liability, owner manager separation and improved access to external financing.

  • Legal Identity

    • A corporation is a legal entity separate and distinct from its owners. It is formed through the filing of articles of incorporation with a regulatory authority.
    • Corporations can enter into contracts, hire employees, sue and be sued, borrow and lend money, make investments, and pay taxes.

  • Owner-Manager Separation

    • Shareholders elect a board of directors to appoint executive-level management.
    • Directors and managers have a primary responsibility to act in the best interest of shareholders and, indirectly, all stakeholders.
    • The separation of ownership and management enables the corporation to obtain financing from a larger universe of potential investors.

  • Owner/Shareholder Liability

    • Risk is shared among all shareholders, who face limited liability.
    • Shareholders share in the risk and return of the company in proportion to their share ownership unless the corporate charter specifies differently.
    • Exhibit 7: Corporate Shareholder Liability
      • Shareholders have voting rights to change operational control
      • Shareholders have limited liability

  • External Financing

    • Corporations can access external financing more easily than other business structures.
    • Corporations are financed with equity by selling shares to investors or reinvesting profits and with debt in the form of loans, bonds, and leases.
    • Exhibit 8: Financial and "Economic" Balance Sheet
      • Difference between Financial and Economic Balance Sheets

  • Taxation

    • Corporations are taxed on their profits, but taxable profits are usually not the same as profits reported on financial statements.
    • Shareholders also pay an additional tax on distributions (dividends) that are passed on to them. This is referred to as the double taxation of corporate profits.

Publicly vs. Privately Owned Corporate Issuers

  • Introduction

    • For corporations, "public" and "private" are often defined by whether the company’s shares are listed and tradeable on an exchange.
    • Most public or listed companies are public limited companies, but public limited companies are not obliged to list their shares on an exchange.
    • Exhibit 10: Publicly vs. Privately Owned Limited Companies
      • Limited Companies
        • Private Limited Companies (e.g. LLC, SARL, GmbH, K.K.)
        • Public Limited Companies (Corporation)
          • Privately Owned
          • Publicly Owned (listed on an exchange)

  • Exchange Listing, Liquidity, and Price Transparency

    • An exchange listing allows ownership to be more easily transferred because investors transact directly with one another in the secondary market on the exchange.
    • An exchange listing provides share price transparency, allowing investors to track how a company’s value changes.

  • Share Issuance

    • Corporate issuers may issue additional equity shares in the capital markets from time to time.

  • Registration and Disclosure Requirements

    • Public companies must register with a regulatory authority and are subject to compliance and reporting requirements.
    • Private companies are generally not subject to the same level of regulatory disclosures.
    • Exhibit 14: Public Companies: Typical Entity Relationships
      • Regulator and Stock Exchange both require registration and mandated disclosures
    • Exhibit 15: Private Companies: Typical Entity Relationships
      • Includes regulator but does not explicitly include stock exchanges although registration is still possible

  • Going from Private to Public

    • Private companies may become public companies (“go public”) in three ways: Initial Public Offering (IPO), direct listing, or acquisition.
    • Exhibit 16: Three Ways Private Companies Go Public
      • IPO
      • Direct Listing
      • Acquisition
        • Acquired by Public Company
        • SPAC

  • Going from Public to Private

    • Public companies may also decide to go private. A “take-private” or “go-private” process involves investors acquiring all of the company’s publicly traded shares and delisting the company from the exchange.
    • The Varieties of Corporate Owners
      • Shareholders include not only individual and institutional investors but also other corporations, governments, and non-profits, which may be controlling owners.