Chapter 1: Business Structures & Ownership

Organizational Forms of Business

Businesses can be structured in several ways, each with distinct characteristics regarding liability, taxation, and access to capital.

Feature	Sole Proprietorship	General Partnership	Limited Partnership	Corporation
Legal Status	No separate legal entity	No separate legal entity	No separate legal entity	Separate legal entity
Owner/Operator	Owner-operated	Partners-operated	GP-operated, LP-invested	Board & Management
Liability	Unlimited personal liability	Unlimited joint liability	Unlimited for GPs, Limited for LPs	Limited liability for shareholders
Taxation	Pass-through to owner	Pass-through to partners	Pass-through to partners	Dual-level taxation (corporate & dividend)
Capital Access	Limited to owner's resources	Restricted by partners' resources	Determined by GPs/LPs	Unrestricted (can issue equity/debt)

Key Features of Corporate Issuers

Corporations are the most common form of issuer in global financial markets due to a unique combination of features that facilitate growth and investment.

Separate Legal Entity

A corporation is legally an "individual," meaning it can enter contracts, own assets, and be sued, separate from its owners.

Separation of Ownership and Management

Shareholders own the company, but professional managers run the daily operations. This separation allows for specialized expertise in management and attracts passive investors.

Limited Liability

This is a cornerstone of corporate structure. A shareholder's financial risk is limited to the amount they have invested in the company's shares. Personal assets are not at risk.

Abundant Access to Capital

Corporations can raise large amounts of capital by issuing equity (shares) and debt (bonds) to a wide range of investors, fueling growth potential.

Taxation

Corporate profits are often subject to "double taxation." The corporation pays taxes on its profits, and then shareholders pay taxes again on the dividends they receive. This is a trade-off for the benefits of limited liability and access to capital.

Publicly vs. Privately Owned Corporate Issuers

The distinction between public and private companies is crucial for investors, affecting liquidity, transparency, and regulation.

Public Companies

Exchange Listing & Liquidity: Shares are traded on public stock exchanges, making them highly liquid and easy to buy and sell.
Price Transparency: Share prices are continuously updated and publicly available.
Share Issuance: Can issue additional shares in public capital markets to raise large sums from a diverse investor base.
Regulation: Subject to extensive disclosure, compliance, and regulatory requirements to protect investors.

Private Companies

No Exchange Listing: Shares are difficult to buy and sell, as there is no public market.
Limited Price Transparency: Sale prices are privately negotiated between owners.
Financing: Rely on private debt or equity from a smaller number of investors (e.g., private placements to accredited investors).
"Locked" Investments: Shareholders often have to wait for an exit event like a sale or an IPO to realize their gains.
Regulation: Face far less disclosure and regulatory scrutiny.

The Lifecycle: Going Public and Going Private

Going Public

Companies go public to raise capital and provide liquidity for early investors. The main methods are:

Initial Public Offering (IPO)

The most common method, where a company hires investment banks to underwrite and sell new shares to the public.

Direct Listing (DL)

No new shares are created. Existing shareholders (like employees and early investors) are allowed to sell their shares directly on an exchange.

Acquisition/SPAC

A private company can become public by being acquired by an already-listed public company or a Special Purpose Acquisition Company (SPAC).

Going Private

This involves an investor group (often private equity firms or company management) acquiring all of a public company's outstanding shares and delisting it from the stock exchange, often using significant debt financing (a leveraged buyout).

Motivations for going private include:

Belief that the company is undervalued.
Desire to escape the costs and scrutiny of being a public company.

The Varieties of Corporate Owners

Ownership of corporations is diverse, including:

Institutional Investors

Mutual funds, pension funds, insurance companies.

Individual Investors

Retail investors who buy shares for their personal portfolios.

Other Corporations

Companies holding strategic stakes in other firms.

Governments

Through Government-Owned Enterprises (GOEs) or sovereign wealth funds.

Non-profit Organizations

Endowments and foundations.