Features of Corporate Issuers

In this section, we shall delve more into corporations. Corporate issuers are corporations that raise their capital in financial markets. Understanding corporate issuers is essential for financial analysts because they can raise more capital from investors than governments worldwide.

Key features include:

Legal Identity

When a corporation is formed, articles of incorporation to a regulatory authority are filled. As such, a corporation is considered a legal entity that is unique and separate from its owners. Being a legal entity implies that a corporation has the rights and responsibilities of an individual. As such, it can participate in activities such as signing contracts, hiring employees, suing, being sued, borrowing, lending money, paying taxes, and initiating investments.

Established corporations are subject to regulatory jurisdictions in which they conduct business, list their securities, and are incorporated.

Depending on where the company is incorporated, where business is conducted, and where the company seeks financing, notable activities that regulatory bodies mainly concentrate on include:

• Registration of corporations.
• Financial and non-financial reporting and disclosure.
• Corporation’s capital market activities.

Owner-Manager Separation

A notable corporation feature is owner-operator separation; the business owners and managers are independent. In other words, the business owners are excluded from the company’s day-to-day operations.

The owners elect a board of directors to run the business. The board then hires the CEO and other senior managers to oversee the corporation’s day-to-day operations. The board must conduct business that aligns with the owners’ interests; otherwise, the owners may enact change through voting rights linked to their shares.

In addition to adhering to the owner’s interests, the board is expected to consider the interests of other stakeholders such as employees, creditors, customers, suppliers, regulators, and members of the society where the corporations operate.

The Owner-Manager separation of a corporation allows corporations to access capital financing easily. Capital is the only requirement to become an owner, so the owners can leverage greater resources to run the business.

Owner/Shareholder Liability

The risks in a corporation are shared among all owners. However, owners have limited liability. This implies that the maximum loss owners can incur is the amount of their investment in the business. Moreover, returns are shared by the owners through equity claims proportional to their respective shares.

There is no contractual obligation to repay the ownership claim. Nevertheless, after settling liabilities, the owners have a residual claim on the corporation’s cash flows and assets.

External Financing

Corporations access capital financing through capital providers. These individuals and entities are willing to finance a company in return for the company’s issued securities. The issued securities raise two types of capital:

• Ownership capital (equity): This is the money invested by a corporation’s owners in return for the company’s ownership (they become shareholders). Hence, they are entitled to receive profit distributions in the form of dividends.
• Borrowed capital (debt): Money borrowed from lenders (bondholders). The bondholders exchange their capital for issued debt securities with no ownership entitlement.

Capital providers include corporations, family offices, governments, and individuals.

Taxation

Corporations are subject to the tax authority and tax codes outlining the issuer’s tax reporting, payment, and status. Tax regimes on corporations vary from country to country.

In most countries, corporations are taxed directly on their profits. Moreover, shareholders may be taxed on dividends (double taxation of corporate profits). However, in some countries, shareholders are not taxed if the corporations had initially paid taxes on the dividends distributed.

Question

Double taxation will matter the most for:

1. A company that reinvests its after-tax profits each year into business expansion.
2. Shareholders who live in a country with high tax rates on dividend income.
3. A company in a tax jurisdiction that pays no tax at all.

Solution

B is correct. High tax rates on shareholder dividends will cause companies to retain profits, change the organizational form of business or find an alternative way of distributing profits.

A is incorrect. No double taxation occurs because the company reinvests its profits; thus, no dividends are paid to shareholders.

C is incorrect. Double taxation will not be an issue if the company is not entitled to pay tax.