Business structure determines the legal structure and purpose of a business, which
provides guidelines for how to run a business and influences the operations of that
business
Sole proprietorship is the business structure which has only one
owner
Become public by issuing shares in an IPO
Personally funds the capital needed to operate the business
Share issuance
Raise more equity capital after listing through issuing
Retains full control over the operations of the business Owner
additional shares in primary market
Participates fully in the financial returns and risks of the business
Sole proprietorship Shares are traded on an exchange → allowing
ownership to be more easily transferred
Legal relationship: no legal identity
Share price is determined through trading activities on the exchange
Own-Operator relationship: operated by its owner
Main characteristics Exchange listing and share ownership Stock price changes are observable overtime, so company’s value
Business liability: the owner has unlimited liability and retains all risk Public companies changes can be observed
Taxation: taxed as personal income Market capitalization = MV of shares = Current stock price x Total shares outstanding
Enterprise value = MV of shares + MV of debt - Cash
General partnerships is the business arrangement which has 2 or more
owners (partners) share responsibilities in running business. Partners roles
and responsibilities are outlined in a partnership agreement Registration and disclosure requirements are subject to greater regulatory and disclosure requirements
Legal relationship: no legal identity, partnership agreement sets ownership LBO
General partnership Going private from public
Own-Operator relationship: Partner-operated business MBO
Main characteristics
Public and private corporations
Business liability: Partners share all risk and business liability Share issuance Private placement
Taxation: taxed as personal income for all partners Shares are not traded on an exchange → ownership
transfer is much more difficult
at least 1 general partner (GP) responsible for the management of the business
a form of partnership where Share price is decided when both parties agree
Exchange listing and share ownership
limited partners (LPs) invested in the limited partnership
Private companies Valuation is more challenging
Legal relationship: no legal identity, partnership agreement sets ownership
The investment in private company is usually locked up until the company is acquired for
Limited partnership
M1: CORPORATE cash or shares by another company, or it goes public
Own-operator relationship: GP operates the business
Business structure STRUCTURES AND
Main characteristics OWNERSHIP Registration and disclosure requirements generally not subject to the same level of regulatory oversight
Business liability: GP has unlimited liability and LPs have limited liability – they can lose only
Common forms
up to the amount of their investment
Going public from private Acquisition
Taxation: taxed as personal income for all partners
Startup
Owner of corporation have limited liability
Corporation is an evolved model of the limited partnership, Growth
known as limited liability company (LLC):
Corporations have greater access to the capital and expertise Life cycle of corporations
Maturity
Public for-profit corporation
For-profit corporation Decline
Private for-profit corporation Classification
Prefer investment in projects involve greater risks and potential returns
Non-profit corporation Shareholders
Would like the company to simply increase dividend payments and share repurchases with
debt proceeds
A corporation has own legal rights and obligations of an
individual, and engage in many activities Investor perspective
Legal identity Prefer investment in less risky projects that increase cash flows certainty to timely service
the debt
Business operates in many different geographic regions
Debtholders
are subject to regulatory jurisdictions
Often rely on covenants to protect them against exploitive actions and compromise the
safety of their investment
the owners own the business
Owner-Operator separation Corporation
Shareholders have no contractual rights and cannot force the company into bankruptcy or
BOD and company management operate the business
liquidation proceedings → Less risky
Financing through equity
Owners have limited liability, The maximum amounts they can lose is
Common for companies with unpredictable cash flows or early-stage companies
the amount they invested
Business liability Main characteristics Issuer perspective Debtholders have legal rights to force the company to liquid assets or go bankrupt to meet
Owners have residual claim to the company’s net assets after its its contractual obligations → Riskier funding option
liabilities have been paid
Financing through debt
Bond increase risk by increasing leverage
equity securities
Capital financing
Preferred by companies with predictable cash flows
debt securities
The corporation is subject to the tax authority and tax code governing
May be double taxation for shareholders Taxation
Different among countries