Organizational Forms, Corporate Issuer Features, and Ownership

This learning module introduces the Corporate Issuers topic area, which covers the fundamentals of how corporations are organized and governed and how they make operating, investing, and financing decisions. Financial analysts must have a strong understanding of corporate issuers because they are the largest type of issuer in financial markets globally; many analysts are focused entirely on analyzing and investing in their debt or equity instruments. In the first lesson of this module, we describe and compare the legal organizational forms of businesses, emphasizing their similarities and differences and important implications for investors. The second lesson focuses on the corporate organizational form and its key features, such as the separation of ownership and management, limited shareholder liability, access to financing, and tax issues. In the final lesson, we compare privately held and public corporate issuers, including the mechanisms of how corporate issuers go public and are taken private.

• Businesses are legally organized as sole proprietorships, partnerships, or limited companies, which differ by several attributes, including legal identity, owner–manager relations, owner liability, taxation, and access to financing. In practice, organizational forms are jurisdiction specific; our focus is on common characteristics.
• The limited company form, often known as the corporation, offers advantages over the other two forms by improving the ability to raise capital, through limited shareholder liability, the separation of ownership and management, and fewer restrictions on the number of owners and transferring ownership. In most jurisdictions, there are two types of limited companies: private limited companies and public limited companies.
• Private limited companies tend to have some restrictions on ownership but pass-through taxation like partnerships. Public limited companies have no ownership restrictions, but their income can be taxed at both the company and shareholder level. While public limited companies do not have to go public by selling their shares on an exchange, it is this form that is most suitable for becoming a publicly traded company.
• Corporate shareholders elect a board of directors that appoints executive management to operate the company. Shareholders effect change primarily through their ability to replace directors.
• Corporations that seek external financing in financial markets, known as corporate issuers, can utilize either public or private markets, and these choices have implications for the liquidity and price transparency of the company’s securities, as well as its ability to raise future f inancing and the degree to which it must disclose information.
• Corporate issuers can change their status from privately held to publicly traded (or “listed”) through a variety of mechanisms, including an initial public offering. Publicly traded issuers can be taken private through several mechanisms, including a leveraged buyout.
• Shareholders of corporate issuers include not only individuals and institutional investors, such as pension funds and mutual funds, but also governments, non-profits, and other corporations.