Corporate Issuers and Business Structures Overview - PDF

**[CORPORATE ISSUERS]** **Business Structures & Corporations** Businesses can be set up as: 1. **Sole Proprietorships** -- Owned and run by one person. 2. **Partnerships** -- Owned by two or more people. 3. **Limited Companies (Corporations)** -- Separate legal entities from owners. Eac...

**[CORPORATE ISSUERS]** **Business Structures & Corporations** Businesses can be set up as: 1. **Sole Proprietorships** -- Owned and run by one person. 2. **Partnerships** -- Owned by two or more people. 3. **Limited Companies (Corporations)** -- Separate legal entities from owners. Each type differs in: - **Legal Identity** -- Whether the business is legally separate from its owner(s). - **Owner-Manager Relationship** -- Whether owners actively manage the business. - **Liability** -- Whether owners are personally responsible for business debts. - **Taxation** -- How profits are taxed. - **Financing** -- Ability to raise money from investors or banks. **Why Corporations (Limited Companies) Are Preferred** Corporations (also called **limited companies**) have advantages over sole proprietorships and partnerships because they: ✔ **Can raise capital more easily** -- More investors can contribute funds.\ ✔ **Limit shareholder liability** -- Owners are not personally responsible for company debts.\ ✔ **Separate ownership from management** -- Shareholders own, but managers run the company.\ ✔ **Allow easy transfer of ownership** -- Shares can be bought or sold freely. Most **limited companies** fall into two categories: - **Private Limited Companies** -- Ownership restrictions but tax benefits (pass-through taxation). - **Public Limited Companies** -- No ownership restrictions, but subject to double taxation (company & shareholder). Public limited companies **do not have to sell shares on a stock exchange**, but they are best suited for becoming publicly traded. **Corporate Governance & Shareholders** - **Shareholders elect a Board of Directors**, who oversee the company and appoint management. - **Shareholders influence the company** mainly by electing or replacing directors. **Corporate Issuers & Raising Capital** Companies needing external funding (**corporate issuers**) can raise money in: - **Public Markets** -- Selling shares publicly (greater liquidity, transparency, and regulation). - **Private Markets** -- Raising funds from select investors (less transparency, but fewer regulations). **Going Public or Private:** - A **private company can go public** through an **Initial Public Offering (IPO)**. - A **public company can go private** through a **leveraged buyout (LBO)** or similar strategies. **Who Owns Corporate Shares?** Shareholders can be: - **Individuals** - **Institutional investors** (pension funds, mutual funds) - **Governments, non-profits, or other corporations** **Explanation of Business Structures** **1️. Sole Proprietorship** - **Definition**: A business owned and run by one individual. - **Key Features**:\ ✔ **Full control** -- The owner makes all decisions.\ ✔ **Unlimited liability** -- The owner is personally responsible for all business debts.\ ✔ **Pass-through taxation** -- Profits are taxed as the owner\'s personal income.\ ✔ **Limited financing options** -- Growth is constrained by the owner's resources. **Example**: A small family-owned store or a freelancer using personal savings to start a business. **2️. General Partnership** - **Definition**: A business owned by two or more individuals (partners). - **Key Features**:\ ✔ **Shared control** -- Partners manage the business together.\ ✔ **Unlimited liability** -- Each partner is personally responsible for debts.\ ✔ **Pass-through taxation** -- Profits and losses are divided among partners and taxed as personal income.\ ✔ **Increased resources** -- More capital and expertise compared to sole proprietorships. **Example**: A law firm or a construction business where multiple partners invest and share responsibilities. ⚠ **Risk**: If one partner cannot pay debts, the others must cover them. **3️. Limited Partnership** - **Definition**: A business with two types of partners: - **General Partner (GP)** -- Manages the business and has **unlimited liability**. - **Limited Partners (LPs)** -- Investors with **limited liability** (only risk losing their investment). - **Key Features**:\ ✔ **GP has full control** -- LPs have no say in daily operations.\ ✔ **LPs have limited liability** -- Only at risk for their investment amount.\ ✔ **Pass-through taxation** -- Profits are taxed at the partner level.\ ✔ **More capital** -- Attracts investors who don't want management responsibility. **Example**: A real estate investment partnership where a GP manages properties, and LPs provide funding. **4️. Limited Liability Partnership (LLP)** - **Definition**: A type of partnership where **all partners have limited liability** (no unlimited liability for a GP). - ✔ **Limited liability for all partners** -- Unlike a general partnership, **all partners in an LLP are protected** from personal liability. This means that if the business faces financial losses or lawsuits, partners' **personal assets (e.g., house, savings) remain safe**. They only risk losing their investment in the business. - ✔ **Shared management** -- In an LLP, **partners manage the business together**, but some may take on leadership roles as **managing partners**. Unlike a **limited partnership (LP),** where only general partners manage, LLP allows **all partners to participate in decision-making** while still maintaining limited liability. - ✔ **Pass-through taxation** -- LLPs are **not taxed at the entity level** like corporations. Instead, **profits flow directly to partners**, who report their share of income on their **personal tax returns**. This helps **avoid double taxation** (i.e., no separate corporate tax before income reaches partners). - ✔ **Used for professional firms** -- LLPs are commonly used in **law firms, accounting firms, consulting firms, and medical practices**. Many jurisdictions allow only **licensed professionals** to form LLPs since these businesses benefit from **liability protection while allowing professionals to co-manage the firm**. A screenshot of a computer AI-generated content may be incorrect. **Explanation of Limited Companies (Corporations)** Limited companies (also known as **corporations**) provide **limited liability** to owners and a structured way to raise capital. They have a more formal organizational structure than partnerships. **Types of Limited Companies** **1️. Private Limited Companies (LLC)** **Similar to a limited partnership** but with added benefits: ✔ **Limited liability for all owners** -- Shareholders are not personally responsible for company debts.\ ✔ **Easier transfer of ownership** -- Shares can be traded but often require approval for transfer.\ ✔ **Separation of ownership & management** -- Owners (shareholders) elect a **board of directors** to manage the company.\ ✔ **Pass-through taxation in some jurisdictions** -- Profits are taxed only at the shareholder level **Examples**: LLC (U.S.), GmbH (Germany), SARL (France), and G.K. (Japan). **2️. Public Limited Companies (Corporations)** **Suitable for large companies looking to raise capital from public investors.**\ ✔ **No restrictions on number of shareholders** -- Shares can be freely traded on stock exchanges.\ ✔ **Limited liability for shareholders** -- They only risk losing their investment.\ ✔ **Separation of ownership & management** -- Managed by professional executives under the **board of directors**.\ ✔ **Better access to financing** -- Can issue stocks and bonds to raise capital. ❌ **Double taxation** -- Corporations pay corporate taxes, and shareholders pay taxes on dividends. - **Examples**: C-corporation (U.S.), AG (Germany), Société Anonyme (France), K.K. (Japan). - **Famous Public Companies**: Apple, Amazon, Toyota, Coca-Cola. **Structure of a Corporation** Corporations have a **hierarchical structure**: - **Shareholders** -- Owners who vote on major decisions and elect the **Board of Directors**. - **Board of Directors** -- Oversees management and ensures company goals align with shareholders\' interests. - **Executives (CEO, CFO, etc.)** -- Handle daily operations and business strategy.  **Key Takeaways** ✔ **Corporations offer the best access to financing** but face **double taxation**.\ ✔ **Private limited companies** are good for smaller businesses that want **pass-through taxation**.\ ✔ **Public corporations** dominate global markets due to their ability to **raise capital efficiently**. **Corporate Issuers & Shareholder Liability** Corporate issuers are businesses that **raise capital in financial markets**, such as selling stocks or bonds to investors. Corporations are a preferred business structure because they provide **limited liability, separation of ownership and management, and better access to financing**. **Key Features of Corporate Issuers** **1️. Legal Identity** - A **corporation is a separate legal entity** from its owners (shareholders). - It can **enter contracts, hire employees, borrow/lend money, sue, be sued, and pay taxes** like an individual. - Corporations often operate **in multiple jurisdictions**, so they must comply with various regulations, including:\ ✔ **Company incorporation laws**\ ✔ **Financial reporting & disclosures**\ ✔ **Stock market regulations** **2️. Separation of Ownership & Management** - **Shareholders (owners) do not manage the company directly**. Instead:\ ✔ **Shareholders elect a Board of Directors** to oversee the company.\ ✔ The **Board appoints executives** (e.g., CEO, CFO) to manage daily operations. - This structure allows corporations to attract investors who want **ownership benefits without management responsibilities**. ⚠ **What if management acts against shareholder interests?** - Shareholders can **vote to replace the board** (e.g., in annual general meetings). - Some investors use **activist strategies** to influence corporate decisions. **3️. Shareholder Liability** - Shareholders **have limited liability**, meaning:\ ✔ They can **only lose the amount they invested** (share price can drop to zero).\ ✔ They are **not responsible for corporate debts** (unless they personally guarantee them). - **Risk & return are proportional to share ownership** -- the more shares a person owns, the greater their financial exposure. 📌 **Example:** - If a shareholder owns **1% of a company's shares**, they share **1% of its profits & losses**. - If a company **goes bankrupt**, shareholders lose **only their investment** (but no further personal liability). **Key Takeaways** ✔ **Corporations are independent legal entities** that operate separately from their owners.\ ✔ **Shareholders have voting rights** to influence company decisions but do not manage operations.\ ✔ **Limited liability protects shareholders** from corporate debts beyond their investment.\ ✔ **Stocks allow easy ownership transfer**, making corporations attractive for investors. **Explanation of External Financing, Financial Statements, and Taxation** Corporations require **external financing** to fund operations and expansion. They do this through **equity (selling shares) and debt (loans, bonds, leases).** **1️. External Financing** Corporations have better access to financing than other business structures because:\ ✔ Ownership is **separate from management**, allowing more investors to participate.\ ✔ Investors **only need to buy shares** to become part-owners.\ ✔ Corporations attract financing from **institutions** like mutual funds, pension funds, banks, and governments. **Types of Financing:** 1. **Equity Financing** - Selling **shares (stocks) to investors**. - Shareholders may receive **dividends (profit distributions).** - No repayment obligation but shareholders have **ownership rights**. 2. **Debt Financing** - Borrowing through **loans, bonds, or leases**. - Must be **repaid with interest** on a fixed schedule. - Creditors have **no ownership stake** but can claim assets if debts are unpaid. 📌 **Key Difference:** - **Debt holders get paid first** (fixed interest). - **Equity holders are paid last** but can earn higher returns if the company grows. **Financial vs. Economic Balance Sheet** - The **Financial Balance Sheet** tracks traditional assets, liabilities, and equity. The economic balance sheet expands on the traditional view by considering **intangible claims and obligations** not captured in financial statements. - **Claims:** - Suppliers: Expectations of future orders. - Customers: Brand loyalty and long-term contracts. - Employees: Skills, expertise, and future contributions. - Community: Reputation and social responsibility. - Governance: Internal and external oversight. - **Obligations:** - Similar to claims, but focused on the company's commitments (e.g., maintaining supplier relationships, employee benefits). **Key Points:** - The economic balance sheet accounts for **intangible assets and risks**, providing a holistic view of the company's value beyond financial metrics. - This perspective helps us understand a company's **long-term sustainability and strategic positioning.** **2️. Financial & Economic Income Statement** The **Financial Income Statement** follows a standard format: 1. **Gross Income** (Total revenue from sales). 2. **Operating Costs** (Supplier, sales, employee costs). 3. **Financial Costs** (Borrowing costs, taxes). 4. **Net Income** (Profit after all expenses). **Economic Income Statement**: The economic income statement measures **Economic Profit**, reflecting the company's performance relative to the **required rate of return on equity.** - **Economic Profit = Net Income - (Required Rate of Equity Return × Equity).** - If economic profit is positive, the company is generating returns **above what investors expect**. - If negative, it indicates the company is **underperforming** relative to investor expectations. **Key Points:** - Economic profit assesses whether the company is **creating or destroying value** for shareholders. - It highlights the importance of **meeting or exceeding investor expectations**, not just achieving positive net income. **3️. Corporate Taxation & Double Taxation** ✔ Corporations **pay tax on profits** based on local tax laws.\ ✔ **Taxable profits ≠ Accounting profits** (because tax codes differ from accounting rules).\ ✔ **Double taxation** occurs when: 1. **Corporations pay taxes on earnings.** 2. **Shareholders pay tax again on dividends received.** 📌 **Example:** - A company earns **\$1 million** in profit and pays **25% corporate tax** → **\$750,000 remains**. - If the company distributes **\$500,000 in dividends**, shareholders might pay **15% personal tax**, leaving them with **\$425,000 after tax**. **Why Corporations Still Prefer This Structure?** ✔ **Reinvesting profits** avoids shareholder taxation.\ ✔ In some countries, shareholders get **tax credits** to offset corporate tax.\ ✔ In some regions, **corporate tax rates are lower** than personal tax rates, making corporations more tax-efficient than sole proprietorships. **Key Takeaways** ✔ Corporations use **equity (shares) and debt (loans, bonds) for financing**.\ ✔ The **economic balance sheet** includes intangibles like employee skills & governance.\ ✔ **Economic profit** measures if a company meets or exceeds investor expectations.\ ✔ **Double taxation** is a drawback, but reinvesting profits reduces tax burdens. **Public vs. Private Limited Companies** This chart shows how **limited companies** can be classified into two categories: 1. **Private Limited Companies** (e.g., LLC, GmbH, SARL, K.K.) 2. **Public Limited Companies (Corporations)** A black and white text on a black background AI-generated content may be incorrect. **Subcategories of Public Limited Companies:** - **Privately Owned:** Shares are not publicly traded but owned by institutions or individuals. - **Publicly Owned:** Shares are listed on stock exchanges and freely traded. 📌 **Key Takeaway:** Public companies have **better access to capital but face stricter regulations**, whereas private companies have **more control and flexibility** but limited financing options. **Public Companies---Share Ownership Transfer** This diagram illustrates how **shares of public corporations can be freely traded in the secondary market (stock exchange).** **How Share Trading Works:** 1. A **public company issues shares** in exchange for capital (equity financing). 2. Existing **shareholders can sell their shares** to new investors. 3. **New investors purchase shares** in the secondary market. 📌 **Key Difference from Private Companies:** - **Public company shares are easily transferable** on stock exchanges. - **Private company shares require direct negotiation** between buyer and seller. **Public Companies---Share Issuance and Financing Access** This chart shows how a **private company transitions into a public company** through a process called **\"going public\" (IPO)** and continues raising funds. **Stages of Financing for Public Companies:** 1. **Private Placement:** Raising funds from a small group of investors. 2. **Going Public (IPO):** Issuing shares to the public for the first time. 3. **Share Issuance:** Public companies can raise additional capital by issuing new shares over time. 4. **Active Secondary Market Trading:** Investors buy and sell shares in the open market. 📌 **Key Takeaway:** Public companies can raise **large amounts of capital** through multiple share issuances, providing greater funding flexibility. **Private Companies---Share Issuance and Financing Access** This diagram highlights that **private companies do not have public markets to raise capital**. Instead, they rely on: **Private Funding Methods:** - **Private Placements:** Selling shares directly to accredited investors. - **Institutional Investors:** Venture capital firms, private equity funds, and angel investors. - **Limited Share Transfers:** Ownership changes, require direct agreement between buyers and sellers. 📌 **Key Takeaway:** - Private companies **have limited funding options** and must negotiate directly with investors. - They avoid the **complexity and regulations** of being publicly traded.  A screenshot of a computer AI-generated content may be incorrect. **Exhibit 14: Public Companies -- Typical Entity Relationships** This diagram shows the **key entities involved in a public company's operations:** 1. **Regulator (e.g., SEC in the U.S.)** - Public companies must **register** with a financial regulator. - They must provide **mandated disclosures**, including financial statements, major shareholding changes, and management transactions. 2. **Stock Exchange (e.g., NYSE, NASDAQ, LSE)** - Public companies **meet listing requirements** before trading shares. - Their shares **trade freely**, allowing investors to buy and sell ownership stakes. 📌 **Key Takeaway:** Public companies must **comply with strict regulations and transparency requirements** to maintain trust and ensure a fair-trading environment. **Exhibit 15: Private Companies -- Typical Entity Relationships** This diagram highlights the **differences between private and public companies:** 1. **Regulator:** - Private companies **may have fewer disclosure requirements**. - They still **file corporate tax returns** and follow fraud prevention laws. 2. **Stock Exchange (Not Applicable to Private Companies):** - **Private companies cannot list their shares** on public stock exchanges. - Instead, they must **privately negotiate share sales** with investors. 📌 **Key Takeaway:** Private companies avoid the **strict regulations of public companies** but also **face challenges in raising capital** and transferring ownership. **Exhibit 16: Three Ways Private Companies Go Public** This diagram outlines **the three main ways a private company can transition into a public company:** **1. Initial Public Offering (IPO)** - The **most common method** of going public. - A private company **issues new shares to the public**, raising capital. - Requires **investment banks (underwriters)** to help sell shares. - **Example:** **Tesla (2010 IPO) raised \$226 million.** **2. Direct Listing** - The company **lists existing shares on a stock exchange** (no new shares issued). - No underwriters are involved, making it **cheaper and faster** than an IPO. - Works best for **large, well-known brands** that don't need extra funding. - **Example:** **Spotify (2018) used a direct listing to go public.** **3. Acquisition (Two Types)** - **Acquired by a Public Company:** - A private company becomes public by merging with an existing public company. - **Example:** Facebook acquired Instagram, making Instagram's private investors part of a public company. - **SPAC (Special Purpose Acquisition Company):** - A SPAC is a **\"blank check company\"** that raises money through an IPO. - It later **acquires a private company**, automatically making it public. - **Example:** Lucid Motors went public via a SPAC merger in 2021. 📌 **Key Takeaway:** IPOs are **best for companies needing capital**, direct listings are **faster and cheaper**, and acquisitions **allow companies to go public without an IPO process**.  **Going from Public to Private** - A **public company can go private** when investors **buy all its publicly traded shares** and **delist it from the stock exchange**. - Investors typically pay a **premium over the current share price** and often use **debt to finance the acquisition** (leveraged buyout - LBO). - The goal is to **make changes privately**, such as:\ ✔ Restructuring\ ✔ Selling assets\ ✔ Cutting costs\ ✔ Changing management - Once improvements are made, the company may **return to public markets** with a higher valuation. 📌 **Key Takeaway:** Going private allows investors to **make strategic changes without public scrutiny** and **potentially increase the company\'s value**. **2️. Public vs. Private Company Trends** - **Emerging Economies:** - More **public companies** are being created due to **economic growth, foreign investments, and market transitions**. - **Developed Economies:** - Fewer listed public companies due to:\ ✔ More **mergers & acquisitions**, reducing independent companies.\ ✔ **Availability of private capital** (venture capital, private equity).\ ✔ Private companies prefer to **stay private** to maintain control and avoid regulatory costs. 📌 **Key Takeaway:** **Public listings grow in emerging economies**, while **developed markets see fewer new public companies due to better private funding options**. **3️. Types of Corporate Owners** - **Corporations have flexible ownership structures**, including:\ ✔ **Individual investors**\ ✔ **Institutional investors (pension funds, mutual funds, banks)**\ ✔ **Governments**\ ✔ **Non-profits** **4️. Government-Owned Corporations** Governments sometimes own corporations **partially or fully** for strategic or public service reasons: **Why do Governments Own Corporations?** 1. **Public Goods & Infrastructure:** - **Postal services (e.g., USPS, Deutsche Post, Royal Mail)** - **Transportation (airports, railways, public utilities)** 2. **Economic & Industry Control:** - **Commodities & Energy (e.g., oil, gas, mining)** - **Banking & finance (especially in emerging markets)** 3. **Increased Transparency:** - Even fully state-owned firms often have **boards of directors, financial reporting, and audits** to ensure **accountability**. 📌 **Key Takeaway:** **Governments own companies for economic stability, strategic control, and public service.** **Example 7: Saudi Aramco IPO** - **Saudi Arabia created Saudi Aramco** to control its petroleum industry. - To **diversify its economy**, the government planned to **sell a 5% stake for \$100 billion**, valuing the company at **\$2 trillion**. - Due to **valuation concerns and delays**, in **2019, only 1.5% was sold** for **\$25.6 billion** (largest IPO ever). 📌 **Key Takeaway:** **Saudi Aramco's IPO raised record funds but was scaled back due to valuation challenges.** **6️. Government Privatization Trends** - Many government-owned industries **shift to private ownership** due to:\ ✔ **Industry deregulation** (reducing government control).\ ✔ **Technological advancements** (new competitors enter the market).\ ✔ **Need for capital investment** (private sector funding improves efficiency). 📌 **Key Example:** - **Telecommunications industry:** Once dominated by **government monopolies**, it is now largely **privatized** worldwide. - **Energy sector:** Many state-owned utilities are **privatizing power generation**, investing in **renewable energy**. **Example 8: Public Power Corporation S.A. (Greece)** - **1950:** Greek government established **Public Power Corporation (PPC)** as a **state-owned monopoly**. - **2001:** Greece **privatized 34%** of PPC via an **IPO**. - **2021:** Government ownership reduced **from 51% to 34%**, allowing **€750 million in private investment** for **renewable energy projects**. 📌 **Key Takeaway:** **Privatization helped PPC attract private investment and shift to clean energy.** **8️. Non-Profit Corporate Owners** - **Some corporations are owned by non-profits**, such as:\ ✔ **Foundations**\ ✔ **Endowments**\ ✔ **Charitable organizations** - These owners balance **financial goals with social objectives**. **Example 9: Novo Nordisk Foundation & Novo Nordisk A/S** - **Novo Nordisk Foundation** is the **world's largest private foundation**. - Owns **controlling shares** in **Novo Nordisk A/S (biopharmaceutical company)**. - Balances **scientific research funding** with **commercial business operations**. 📌 **Key Takeaway:** **Non-profit organizations can own major corporations while funding scientific and humanitarian initiatives.**