CI 1 Organizational Forms, Corporate Issuer Features, and Ownership

Across most market economies, economic activity runs through three broad kinds of organization: for-profit businesses (also called companies), not-for-profit non-governmental organizations (non-profits), and governments. This module and the ones that follow concentrate on businesses, because analysts spend much of their time studying the markets for business financing. Non-profits and governments enter mainly as investors, and governments as debt issuers are covered in the fixed income material.

When founders set up a business, they pick a legal form that fixes how returns, risks, ownership, and day-to-day control are shared out. Three forms appear in almost every jurisdiction: the sole proprietorship, the partnership, and the limited company. Exact names and legal variants differ by country, so the goal here is the shared attributes rather than an exhaustive catalogue. The forms differ along five attributes:

• Legal identity: whether the business is a separate legal person from its owners.
• Owner-manager relationship: how the owners relate to the people who run the business.
• Owner liability: how far owners are personally responsible for the debts and actions of the business.
• Taxation: how business profits and losses are treated for tax.
• Access to financing: how readily the business can raise capital to grow and spread risk.

Sole proprietorship

The sole proprietorship (or sole trader) is the simplest form. A single owner supplies the start-up and operating capital, keeps full control of management, and takes all the profit, which is taxed as personal income. That owner also carries every risk: liability is unlimited, so personal assets can be reached to settle business debts. In many jurisdictions it is the default form, needing no formal registration, and it dissolves when the owner stops trading or dies. A family-run shop is the classic case. Sole proprietorships are the most numerous businesses in most economies and are valued for their simplicity and flexibility, but their growth is capped by one person’s capacity to raise money, absorb risk, and serve as the only owner.

Partnerships

A partnership lets several owners pool capital and share the risk and return. Three varieties recur: the general partnership, the limited partnership, and the limited liability form.

A general partnership has two or more owners, the general partners, who run the business together. It resembles a sole proprietorship, except that extra owners bring more capital and complementary expertise and share the risk. A written partnership agreement usually sets out roles and the split of profits, losses, and obligations, although a partnership can also be formed verbally or by conduct. Every partner has unlimited liability, and if one partner cannot cover a share of the debts, the others stay fully liable. Builders, contractors, and joint ventures are typical examples. Growth remains limited because the partners are still personally on the hook.

A limited partnership must include at least one general partner (GP), whose liability is unlimited and who usually runs the business, while the limited partners (LPs) have liability capped at what they invested and often take no part in management. With limited liability, an LP personal assets sit apart from the obligations of the business. Profits and losses are split per the agreement, with the GP typically taking a larger share in return for bearing more risk. These agreements can be intricate, with several partnership tiers and different sharing arrangements.

A limited liability partnership (LLP), available in some jurisdictions, dispenses with a general partner and is made up entirely of limited partners, so no owner faces unlimited liability. The partners share management, often naming one or more managing partners. In places such as the United States, LLPs are restricted to professional services firms (law, accounting, engineering, architecture) and may face limits on partner numbers and on equity investment.

Like sole proprietorships, partnerships are usually pass-through entities for tax. A pass-through pays no tax at the entity level: profits and losses flow to the partners, who are taxed personally, and this happens whether the income was actually distributed or retained and reinvested.

Limited companies

A limited company shares much with a limited partnership but adds features that widen access to capital and expertise. Most jurisdictions recognize two kinds: private limited companies and public limited companies.

A private limited company resembles a limited partnership but grants limited liability to all owners, divides ownership into tradeable units called shares, and separates owners from managers. The owners, known as shareholders or members, choose a board of directors to steer the company, approve distributions of profit, and typically hire professional managers. Names vary widely: limited liability company (LLC) or S corporation in the United States, G.K. in Japan, SARL in France, GmbH in Germany, and company with limited liability in China. In many jurisdictions these companies cap the number of owners by law and call for a vote before ownership can change hands, yet they are pass-through entities, so income is taxed only at the shareholder level.

A public limited company, often called a corporation, is similar to a private limited company but, in most jurisdictions, faces no legal limit on the number of owners or on transferring ownership, while still offering limited liability and the separation of ownership and management. This makes it the natural form for a company that intends to go public, and it is the dominant form worldwide by revenue and asset value. Its main drawback is tax: the other forms are taxed only once, at the owner level, whereas a public limited company is taxed on its business income and then again at the personal level when profits are distributed as dividends. If profits are retained and reinvested, the second layer does not apply, which suits companies that plan to fund growth from retained earnings. Names include C-corporation in the United States, corporation in China, société anonyme in France, AG in Germany, and K.K. or stock company in Japan.

The previous section noted the corporate advantages of limited liability, the split between ownership and management, and easier access to external financing. Here we look more closely at corporations that raise capital in financial markets, known as corporate issuers. They matter greatly to analysts because, collectively, they draw more capital from investors than governments themselves do across the globe.

Legal identity

A corporation is a legal person in its own right, set apart from its owners and brought into being by filing articles of incorporation with a regulator. It holds many of the rights and duties of an individual: it can sign contracts, employ people, sue and be sued, borrow and lend, make investments, and pay taxes. Large corporations often operate across many regions and must answer to each jurisdiction in which they are incorporated, do business, or raise money. The obligations cover registration, disclosure through financial and non-financial reporting, and activity in the capital markets (issuing, trading, and investing).

Owner-manager separation

In most corporations, the people who own the business (the shareholders) are kept apart from the people who run it (the board and management). Shareholders stay out of daily operations. Instead they elect a board, and the board appoints senior managers, among them the chief executive officer, who answers for the company decisions on investing, financing, and operations. Directors and managers owe a primary duty to act in the interest of shareholders and, indirectly, of all stakeholders. This separation is what lets a corporation draw on a far larger pool of investors who have no wish to manage. If the board or management fails to serve shareholders, shareholders can push for change through the voting rights attached to their shares, for example by voting to replace directors, though that can take time.

Shareholder liability

All shareholders face limited liability: the most they can lose is the amount they put in, because a share may drop all the way to zero but no lower, and holders carry no liability for the corporation debts unless they have separately guaranteed them. Risk and return are shared in proportion to holdings unless the charter says otherwise. Ownership is sliced into shares of small denomination, so stakes are easy to buy and sell; some issuers have more than one billion shares outstanding, meaning ownership is divided into tiny increments. Some corporations also create several share classes that carry distinct risk and return profiles.

External financing

Because buying a share is all it takes to become an owner, corporations reach outside capital more easily than other forms. The corporate form is costlier to set up and run, but it is preferred once capital needs outstrip what an individual or a few partners can supply. The money can come from individuals or from institutions: banks, pension funds, mutual funds, governments, non-profits, and fellow corporations. It takes two shapes. Equity is raised by selling shares or by reinvesting profits; debt is raised through loans, bonds, and leases. Equity holders may receive distributions of profit, called dividends, whereas debt carries a fixed repayment date and interest. Either can be raised privately by contract or in the form of a standardized security that may trade among investors on a public exchange.

A firm financial balance sheet lists its assets against its debt and equity financing; a broader economic balance sheet also recognizes hard-to-quantify items such as the human capital of employees and supplier and customer relationships. In the same spirit, financial net income is what remains after fixed obligations are met, while economic profit is the return to owners above their required rate of return on equity.

Taxation

Corporations are generally taxed on their profits, and taxable profit usually differs from reported accounting profit because tax codes and accounting standards diverge. In many countries shareholders then pay a further tax on dividends, the double taxation of corporate profits. Some countries relieve this: shareholders may owe no dividend tax where the company has already been taxed on those earnings, or they may receive a personal tax credit for their share of the corporate tax paid. Elsewhere corporations pay little or no tax, or face different regimes within one country.

Despite this drawback the corporate form stays attractive. Sole proprietors and partners are frequently taxed on every bit of profit regardless of whether it is paid out, whereas a corporation that retains and reinvests profit sidesteps the shareholder layer entirely. Where corporate rates sit below personal rates, it can even pay to store profit inside the business.

For corporations, the labels public and private (or listed and unlisted) usually depend on whether a company shares change hands on an exchange. Note a possible source of confusion: this is not the same distinction as private versus public limited companies from the first section. Most listed companies are public limited companies, but a public limited company is not obliged to list its shares.

An exchange, called a stock exchange for equities, is a rules-based, open-access venue where instruments trade with price and volume transparency visible to issuers, investors, and their intermediaries. Beyond the listing itself, public and private companies differ in the ease of transferring ownership between investors, the process for issuing new shares, and registration and disclosure duties.

Listing, liquidity, and price transparency

A listing lets owners move shares easily, because investors deal with each other in the secondary market. A buy order makes someone a shareholder and a sell order trims a position; this can settle almost at once for a handful of shares in a liquid name, though a large block in a thinly traded one takes longer. A listing also produces a transparent, continuously updated share price, so investors can track how the company value changes. The actively traded shares that are not locked up by insiders, strategic investors, or sponsors are the free float, often quoted as a percentage of shares outstanding.

By contrast, the shares of a private company do not trade on an exchange, so there is no visible valuation or price transparency. Transferring them is much harder: a seller has to find a willing buyer and agree a price, and even after that the company can still block the transfer, so private shareholders often stay locked in until the business is bought for cash or shares or lists publicly. Private status carries offsetting benefits, though. There are fewer shareholders to answer to, early-stage private investments can earn high returns if the company succeeds, and disclosure and the cost of raising private financing are both light. Claims that private firms perform better by focusing on the long term rather than on quarterly earnings rest on thin empirical evidence.

As an example, L Oreal S.A., a French société anonyme and the world largest beauty company, has been listed since 1963 and had roughly 535 million shares outstanding at the end of 2021. The Bettencourt Meyers family held about 33 percent and Nestlé about 23 percent, leaving a free float near 44 percent in the hands of institutional investors, individual investors, and employees.

Share issuance

A public issuer can sell new shares that then trade in the secondary market once issued. A private company instead raises smaller amounts in the primary market from fewer investors who tend to hold for longer, usually through a private placement whose terms are set out in a legal document. Private placements are often confined to accredited or sophisticated investors, those whom regulators consider able and willing to take on the added risk a non-public offering carries. Public companies may also conduct private placements, subject to regulatory limits.

Registration and disclosure

Transparency is perhaps the defining trait of public companies. They must register with a regulator and meet ongoing compliance and reporting rules. Companies listed on US exchanges such as the NYSE and NASDAQ file audited financial statements and other information quarterly with the Securities and Exchange Commission, accessible through the EDGAR system or the company website; in the European Union, statements are filed at least semiannually in the standardized ESEF format. Public company annual reports regularly run past 100 pages. They must also report significant shifts in voting-right holdings and any other information that could move the share price, such as share dealing by managers and directors, which may signal confidence or prompt questions about strategy. Private companies escape most of these requirements, though some rules bind both (prohibitions against fraud, the duty to file tax returns), and some private firms disclose to owners and lenders voluntarily to ease future fundraising.

A private company can become public, or go public, in three ways: an initial public offering, a direct listing, or an acquisition. Tesla is a familiar illustration. Formed as a corporation in 2003, it drew venture capital (Elon Musk invested USD 6.3 million in 2004, becoming the largest shareholder), listed through a 2010 initial public offering that raised USD 226 million, and by 2021 reached a USD 1 trillion market capitalization. Its corporate form let it raise both debt and equity and retain key people through equity-based compensation.

Initial public offering

To complete an initial public offering, a company must satisfy the exchange listing requirements and usually engages investment banks to underwrite the new share sale. The money raised flows to the issuing company, whose shares then start to trade on the exchange.

Direct listing

A direct listing is far less common and differs from an initial public offering in two ways: it uses no underwriter, and it issues no new shares, so it raises no capital. The firm merely places its existing shares on an exchange at a market-determined price, and those shares reach the public only as current holders sell them. Direct listings can be quicker and cheaper, but they are usually undertaken only by larger, established companies with a recognized brand. In early 2018, for instance, the Sweden-based music streaming firm Spotify Technology SA was the first foreign issuer to go public on the New York Stock Exchange (NYSE) through a direct listing. Already a well-known brand with more than 70 million global subscribers and over USD 5 billion in revenue, Spotify explained that this path let it list without diluting current shareholders, give those holders liquidity, and offer buyers and sellers equal access.

Acquisition, including SPACs

A private company can also turn public by being acquired by a company that is already public. Because the acquirer is usually the larger party, an investor in the combined entity has only minor exposure to the acquired business. A second route uses a special purpose acquisition company, an approach reminiscent of the reverse merger that was widely used in the 1990s and early 2000s. Structurally, a SPAC is a shell entity, nicknamed a blank check company, whose only purpose is to buy some as-yet-unnamed private business later on. It raises capital and lists through its own initial public offering, holds the proceeds in a trust account that can be used only to complete an acquisition (otherwise the money is returned to investors), often specializes in one industry, and has a finite window, such as 18 months, to find a target. Once the SPAC completes its purchase, the target turns into a public company. This mechanism has largely displaced the older reverse merger, which usually relied on a dormant listed shell that carried a prior business and trading record.

Going private

A public company can also decide to go private. In a take-private, investors acquire all of the publicly traded shares and delist the company from the exchange, usually paying a premium over the prevailing share price and frequently funding the purchase with borrowed money. They act because they believe steps such as management changes, asset sales, restructuring, or cost savings can produce a value above the premium and the financing cost, and private control keeps those moves out of public view. Years later they may take the company public again if they reach the valuation they wanted.

These trends carry information. The number of listed companies is rising in many emerging economies, which tend to show faster growth, a shift toward open markets, and foreign capital inflows, and it is falling in developed economies. The decline in developed markets reflects several forces: more mergers and acquisitions, which reduce the count of independent listed firms; a growing supply of private capital such as venture capital and private equity, which lets companies raise money while avoiding the cost, scrutiny, and compliance of a listing; and a preference among some firms to remain private to preserve control for incumbent owners and management.

Corporations allow wide flexibility in who owns them and why. Their shareholders span individuals and institutions like pension funds and mutual funds, and reach further to governments, non-profits, and fellow corporations, any of which may hold a controlling stake.

Government owners

A government sometimes creates a legally separate corporation while keeping full or partial ownership, giving it a board, a management structure, and reporting duties such as audited financial statements. This gives taxpayers and outside investors, who here can only be debt investors, a clearer view of whether the entity meets its goals and earns a profit or a loss, which the government budget must cover. The United States Postal Service uses this structure, whereas the postal operators of the Netherlands (KPN), the United Kingdom (Royal Mail), and Germany (Deutsche Post) are owned partly or wholly by investors. Such state-owned corporations appear across developed and emerging economies alike, in some cases to deliver public goods like infrastructure that generate positive externalities, in others to earn a profit in a dominant home-market industry such as commodities or energy; banks, too, are often first established as government institutions. As an economy seeks private capital to expand and diversify, such companies are frequently privatized gradually through an initial public offering.

Saudi Aramco is a leading example. The Saudi government created the Saudi Arabian Oil Company to run the country oil and gas production. Aiming to diversify the economy and reduce reliance on oil, in 2016 it planned to raise up to USD 100 billion by selling a 5 percent stake at a USD 2 trillion valuation. With delays and a lower USD 1.7 trillion valuation, in 2019 it instead sold a 1.5 percent stake on the domestic Saudi exchange for USD 25.6 billion, still the largest initial public offering to date and, at the time, the world most valuable listed corporation. Deregulation or technological change can also drive the shift from state to private ownership, as with the telecommunications monopolies that opened up from the 1980s and with power generation. The largest electricity company in Greece, Public Power Corporation, was set up as a state-owned corporation in 1950; after Greece joined the European Union it lost its generation monopoly, issued an initial public offering for 34 percent of its shares in 2001, cut government ownership to 51 percent through later raises, and in 2021 announced a further EUR 750 million share increase that reduced government ownership from 51 percent to 34 percent.

Non-profit owners

Foundations and endowments are also common corporate shareholders, some of them very large, and they carry societal aims alongside financial ones. The Denmark-based Novo Nordisk Foundation, the largest private foundation anywhere, pursues two aims at once: to give the commercial and research work of its investee companies a stable footing, and to back scientific and humanitarian causes. Acting through Novo Holdings A/S, its holding company, the foundation is the controlling and largest shareholder in Novo Nordisk A/S, the listed, for-profit Danish biopharmaceutical company.

Reading a layered ownership chain

When ownership runs through several entities, the effective stake in the underlying assets is the product of the stakes at each layer.