Corporate structure Flashcards
What are the 4 components to describe a business structure?
- Legal relationship: the legal relationship between the owner(s) and the business.
- Owner-operator relationship: the relationship between the owner(s) of the business and those who operate the business.
- Business liability: the extent to which individuals have liability for actions undertaken by the business or its business debts. Liability can be limited or unlimited.
- Taxation: the treatment of profits or losses generated by the business for tax purposes.
What is a sole proprietorship structure?
- No legal identity, considered an extension of the owner.
- Owner-operated business.
- Owner retains all returns and assumes all risks.
- Profits from business taxed as personal income.
- Operational simplicity and flexibility.
- Financed informally through personal means.
- Business growth is limited by the owner’s ability to finance and personal risk appetite.
What is a general partnership structure?
- No legal identity, partnership agreement set ownership.
- Partner-operated business.
- Partners share all risk and business liability.
- Partners share all returns with profit taxes as personal income.
- Contributions of capital and expertise by partners.
- Business growth is limited by partner resourcing capabilities and risk appetite.
What is a limited partnership?
- No legal identity.
- Partnership agreement sets ownership.
- General partner (GL) operates the business, having unlimited liability.
- Limited partners (LP) have limited liability but lack control over business operations.
- All partners share in return, with profits taxed as personal income.
- Contributions of capital and expertise by partners.
- Business growth is limited by GL/LP financing capabilities and risk appetite, and GP competence and integrity in running the business.
What is a corporation?
- Separate legal entity.
- Owner-operator separation allows for more diverse and greater resourcing with risk control.
- Business liability is shared across multiple limited-liability owners. Each owner has a claim to the corporation’s return proportionate to their equity investment.
- Tax disadvantage for shareholders in countries with double taxation.
- Distributions taxed as personal income.
- Unbounded access to capital and unlimited business potential.
What is an initial public offering (IPO)?
Shares of public companies trade in the secondary market on a stock exchange after going public.
What is the market capitalization, and how is it calculated?
- It is, in theory, what someone would have to pay to acquire ownership of the entire corporation.
- Mkt Cap= current stock price * total shares outstanding
How are shares purchased in a private company?
A private placement memorandum (PPM) which is a legal document describing the business, the terms of the offering, and the risks.
What are accredited investors?
They take greater risks and are subject to less regulatory oversight, and fewer regulator protections.
What are the different ways that a company can go public?
- With an IPO.
- With a direct listing
- With an acquisition
- With a special purpose acquisition company (SPAC)
What is a direct listing?
- It does not need to underwrite, and no new capital is raised.
- Shareholders have access to sell their shares in the secondary market.
What is a SPAC?
- They are companies that have the unique purpose of acquiring an unspecified private company sometime in the future.
- Once a company has been purchased by a SPAC, it becomes public.
What is the level of a startup regarding revenues, CF, business risk, financing need, and financing difficulty?
- Revenues: Low to none
- CF: Negative
- Business risk: High
- Financing need: Proof of concept
- Financing difficulty: Very high
What is the level of a growing company regarding revenues, CF, business risk, financing need, and financing difficulty?
- Revenues: Increasing
- CF: Increasing
- Business risk: Moderate
- Financing need: Scale
- Financing difficulty: Very high to high
What is the level of a mature company regarding revenues, CF, business risk, financing need, and financing difficulty?
- Revenues: Positive & predictable
- CF: Positive & predictable
- Business risk: Low
- Financing need: Business as usual
- Financing difficulty: Moderate to low
