2024 CFA L1: Lecture Notes
Corporate Issuers
LM 1: Organization Forms, Corporate Issuer Features, and Ownership
LEARNING OUTCOME STATEMENTS
• Compare the organizational forms of
business.
• Describe key features of corporate issuers.
• Compare publicly and privately owned
corporate issuers.
Business Structures
Sole General Limited Liability Corporation/
Proprietor Partner Partner/Company PLC
Legal No separate Partnership Limited partners;
Shareholder
relationship legal identity agreement members
Owner-entity Partner
Owner control No owner control No owner control
relationship controlled
Business Unlimited Unlimited Limited Limited
liability
Corporate (profit)
Taxation Personal tax rate Personal tax rate Personal tax rate / Personal
(distributions)
Practice Question
Which of the following is correct with respect to general and limited partnerships?
A. Partners in a general partnership face limited liability.
B. In a limited partnership, the general partner exercises most managerial
responsibilities.
C. In a general partnership, only the general partner faces personal liability;
limited partners’ liability is limited to their investment in the partnership.
Practice Question
Which of the following is correct with respect to general and limited partnerships?
A. Partners in a general partnership face limited liability.
B. In a limited partnership, the general partner exercises most managerial
responsibilities.
C. In a general partnership, only the general partner faces personal liability;
limited partners’ liability is limited to their investment in the partnership.
Answer: B
Limited partnerships have a general partner who manages the partnership,
although the general partner only faces limited liability. General partnerships are
comprised of partners who share management responsibilities, and all partners
face unlimited liability.
Key Features: Lenders vs. Owners
Key Features: Operating Jurisdictions of Corporate Issuers
Corporate issuer – A corporation that raises capital in the financial markets is
subject to regulation in different regions:
• Jurisdiction of organization
• Jurisdiction of operation
• Jurisdiction where financed
And for different activities:
• Registration
• Financial and non-financial reporting and disclosure
• Issuance, trading, and investment of securities (i.e., capital market activities)
Key Features: Legal Identity & Taxation
Corporations have a legal identity separate from that of the owners (shareholders).
This leads first to taxation at the corporate entity. Excess profits distributed to
shareholders are taxed again at the individual level. Corporate profits are said to
be subject to double taxation.
Corporations, then, choose to hold some profits for reinvestment or investment in
new areas.
If corporate tax rates are less than personal tax rates, it may make sense to store
some wealth in the corporation to safeguard it from personal taxes.
Practice Question
Which of the following is the most likely explanation for a separation of ownership
and management in the corporate form leading to greater funding opportunities?
A. Owners have a similar approach to management as corporate
executives.
B. Separating ownership from management prevents people from
managing to their own best interests.
C. Separating shareholders from management responsibilities allows those
to finance the firm who would otherwise be unable to participate directly
in managing it.
Practice Question
Which of the following is the most likely explanation for a separation of ownership
and management in the corporate form leading to greater funding opportunities?
A. Owners have a similar approach to management as corporate
executives.
B. Separating ownership from management prevents people from
managing to their own best interests.
C. Separating shareholders from management responsibilities allows those
to finance the firm who would otherwise be unable to participate directly
in managing it.
Answer: C
Many owners cannot or do not wish to participate in day-to-day management. In most cases,
professional management will have a very different approach to managing, that is attractive
to those without proper experience. Separating management from ownership creates a
conflict of interest for owners & managers.
Public Ownership vs. Private Ownership
Public ownership (i.e., listed) – Listed on a stock exchange
• Ownership transfers on an exchange (i.e., public market)
• Easier issuance and transfer
Private ownership (i.e., unlisted) – Not listed on a stock exchange
• Lower levels of public disclosure required
Public Ownership Terms
Primary market – The initial market for shares of a new company.
Secondary market – After purchase in an initial public offering, shareholders can
sell their shares on a listed exchange or other venue.
Listed company – A company with shares listed on a public exchange. Such
listing provides several benefits, including:
• Easy exchange in a secondary market.
• Price transparency, which allows investors to track investment performance.
Free float – Shares available for trading (i.e., not held by insiders, the
government, or the company itself) that are more freely available to trade on
exchanges.
Private Capital Issuance
Private placement memorandum (PPM) – Describes the business, terms of the
offering, and risks involved in making an investment in the company; aka the
offering memorandum.
Accredited investors – Investors deemed sophisticated enough to take greater
risks and a reduced need for regulatory oversight and protection
Direct listing – A company lists existing privately held shares on an exchange at
a price determined by the market. Does not involve an underwriter and no new
shares are issued, so no capital is raised.
Practice Question
Which of the following is least likely to be a characteristic of publicly held
companies?
A. Exchange-listed.
B. Capital providers privately negotiate equity and debt financing.
C. Minor ownership overlap between management and shareholders.
Practice Question
Which of the following is least likely to be a characteristic of publicly held
companies?
A. Exchange-listed.
B. Capital providers privately negotiate equity and debt financing.
C. Minor ownership overlap between management and shareholders.
Answer: B
Privately negotiated equity and debt financing are more likely to occur with a
privately-held company. Public companies are exchange listed and unlikely to
have major overlap caused by managers holding large numbers of publicly-traded
shares.
Transitioning from Private to Public
IPO – Initial public offering
DL – Direct listing Private
SPAC – Special purpose acquisition co. company
LBO – Leveraged buyout
MBO – Management buyout
Public
company
Acquisition
IPO, DL, or
Private SPAC Public
company company
LBO, MBO
Practice Question
Which method of going from private to public ownership will most likely involve all
existing shareholders?
A. Direct listing (DL)
B. Initial public offering (IPO)
C. Special purpose acquisition company (SPAC)
Practice Question
Which method of going from private to public ownership will most likely involve all
existing shareholders?
A. Direct listing (DL)
B. Initial public offering (IPO)
C. Special purpose acquisition company (SPAC)
Answer: A
In a direct listing, a company lists its existing shares on an exchange. A DL does
not involve an underwriter or newly-raised capital.
