Chapter 1: Analysis of Alternatives Available to Companies

Question 1

C Corporations

Answer 1

Most common organizational structure for med. and large businesses.

Owned by shareholders, who have limited liability.

Indefinite lived.

Taxed at the entity level and on dividends at shareholder level.

Question 2

S Corporations

Answer 2

IRS tax election that is a pass through tax status. Not taxed at the entity level. Passes all income and loss to shareholders.

Question 3

S Corp. Requirements

Answer 3

Must be a domestic corporation.

No more than 100 shareholders, all have to be US citizens.

Only 1 class of stock.

Question 4

Limited Liability Company (LLC)

Answer 4

Offers limited liability to owners. Not recognized by the IRS as a federal classification. Relatively new status.

Question 5

Limited Partnerships (LPs)

Answer 5

Have at least 1 general partner who manages and is responsible for company liabilities.

Normally pass through tax.

Question 6

Revised Uniform Limited Partnership Act (RULPA)

Answer 6

Require LPs to register with appropriate state authorities. May require annual report filing.

Question 7

Trusts

Answer 7

An unincorporated entity formed to hold assets for business or investment purposes.

Managed by a trustee.

Can allow for pass through taxation.

Question 8

Real Estate Investment Trusts (REIT)

Answer 8

Trust that invests in real estate. Technically a tax designation.

Question 9

Types of REITs

Answer 9

Equity - Invests directly in real estate.
Mortgage - Invests in mortgages secured by real estate
Hybrid - Invests in both real estate and mortgages.

Question 10

Requirements for REITs

Answer 10

Must pay at least 90% of income to shareholders.

At least 75% of assets must be real estate.

At least 75% of gross income must come from real estate investments.

Question 11

Institutional Investors

Answer 11

Organizations that pool capital to invest.

Responsible for the majority of trades in the financial markets.

Question 12

Individual Investor

Answer 12

Investor that invests their own capital

Question 13

Accredited Investor

Answer 13

High net worth - liquid assets of $1.0 million or more.
Very high net worth - liquid assets between $5 - $50 million.
Ultra high net worth - liquid assets exceeding $50 million.

Question 14

Qualified Institutional Buyer

Answer 14

Institutional investors with at least $100 million AUM.

Question 15

ESOPs

Answer 15

Benefit plan that invests only in sponsoring company stock.
Can offer tax benefits to the sponsoring company.
Can be a tactic to defend against a hostile takeover bid.

Question 16

Qualified Purchaser

Answer 16

Individuals, family businesses, trusts with $5.0 million in investments.
Company with $25 million in investments.
Investment manager with $25 million in AUM.

Question 17

Initial Public Offering

Answer 17

A company’s first offering of stock to public investors.

Question 18

Follow on Offering

Answer 18

Additional offering of securities by a public company.

Dilutive.

Question 19

Shelf Registration

Answer 19

Allows a company to sell stock at a later date without having to re-register with the SEC.

Question 20

Private Investment In Public Equity (PIPE)

Answer 20

A public company sells stock to a private investor, usually at a discount to the market price.
Registers with the SEC, though not before the deal close. Usually files an 8-k at the closing.

Question 21

Registered Direct Offering

Answer 21

A public offering to a small number of investors pursuant to a shelf registration.
Usually not restricted stock.

Question 22

Merger

Answer 22

A combination of two or more companies.

Usually the product of a voluntary agreement between companies.

Question 23

Acquisition

Answer 23

When a company takes a controlling interest in another.

Can be hostile.

Question 24

Company Sale

Answer 24

When a company puts itself up for sale, either through targeted negotiation or an auction process.
Results in an acquisition.

Question 25

Tender offer

Answer 25

An open solicitation to purchase a significant portion of a company’s stock.
Can come from the company itself or a 3rd party.