Organizational Forms, Corporate Issuer Features, and Ownership

Before analyzing a company's securities, an analyst needs to know what kind of legal entity issued them, who owns it, who bears its losses and how its profits are taxed. This module compares the main business structures, explains why large businesses are almost always corporations, contrasts public and private ownership, and shows how companies move between the two through IPOs, direct listings, SPAC mergers and buyouts.

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What you will learn

1. Compare sole proprietorships, partnerships, limited liability companies and corporations by legal identity, owner liability, taxation, control and access to capital.

Sole proprietors and general partners have unlimited personal liability for business debts.
In a limited partnership, the general partner manages and has unlimited liability; limited partners are passive and their liability is capped at their investment.
Proprietorships and partnerships are pass-through entities: profits are taxed once, as the owners' income.
A corporation is a separate legal entity with limited liability, transferable shares and professional management.
Access to capital rises from proprietorship to partnership to corporation; so does complexity and regulation.

2. Explain the defining features of corporations, including separate legal identity, separation of ownership and control, limited liability and entity-level taxation, and calculate the combined tax burden on distributed profits.

A corporation is a separate legal person with perpetual life; its debts are its own, not its shareholders'.
Shareholders elect the board, the board appoints managers: separating ownership from control creates agency problems.
Limited liability caps each shareholder's loss at the amount invested.
Double taxation: combined rate on distributed profit = t_c + (1 - t_c) x t_d.
Nonprofit corporations are generally tax-exempt and cannot distribute profits; they raise money through donations, grants and debt.

3. Compare public and private corporations in terms of share trading and liquidity, registration and disclosure requirements, ways of raising capital and ownership concentration.

Public shares are listed and liquid with an observable price; private shares are illiquid and valued by negotiation or estimate.
Listing requires registration and continuous disclosure; private companies report mainly to their own investors and lenders.
Public companies raise equity through public offerings; private companies through private placements with venture capital, private equity and other qualified investors.
Private ownership is concentrated, allowing close monitoring; public ownership is usually dispersed.
Costs of being public include compliance, disclosure to competitors and short-term market pressure.

4. Describe how companies go public through initial public offerings, direct listings and SPAC mergers, how they go private through buyouts, and calculate offering proceeds and ownership dilution.

IPO: underwritten sale of new (primary) and possibly existing (secondary) shares; only primary proceeds go to the company.
Direct listing: existing shares start trading with no underwriting and no new capital raised.
SPAC: a listed cash shell merges with a private company, which becomes public at a negotiated valuation; sponsor shares and warrants dilute holders.
Going private: a buyout (LBO or MBO) purchases all public shares, typically financed heavily with debt.
Post-offering ownership = shares still held / total shares after new issuance.

Module at a glance

Sole proprietors and general partners have unlimited liability; limited partners and shareholders do not.
Corporations are separate legal entities with transferable shares, limited liability and professional managers.
Distributed corporate profit is taxed twice: combined rate = t_c + (1 - t_c) x t_d.
Public shares are liquid and transparent; private shares are illiquid and owners are concentrated.
IPO = underwritten sale of new and possibly existing shares; only primary proceeds go to the company.
Direct listings raise no new capital; SPACs take companies public by merger; buyouts take them private.
Post-offering ownership = shares still held / new total shares outstanding.

This free module has 4 lessons, 15 practice questions with full explanations.

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