Introduction to Corporate Finance

PART 1: INTROdUCTION

Limited partnerships are ideal vehicles for funding long-term investments that generate large non-

cash operating losses in the early years of the business, because these losses flow through directly to the

limited partners. This means the limited partners can (under specified conditions) use the tax losses

to offset taxable income from other sources. Disadvantages of LPs include a shallow secondary market

for securities and difficulties with monitoring and disciplining the general partner(s). In some cases,

registering an LP with ASIC allows secondary-market trading of partnership interests; this can reduce or

eliminate the illiquidity problem.

Proprietary Limited Company

A private company is a more complex business structure formed by one or more people who wish to have

a business that is a separate legal entity to themselves. This makes a key distinction with the concepts

of partnerships and sole proprietor forms of organisation. A proprietary limited company creates the roles of

employee, director and shareholder of the company.

Private companies are regulated under the Corporations Act 2001, which sets out substantial

obligations for company directors. Establishment and ongoing administrative costs associated with

Corporations Act compliance can be high. This is why the structure is generally considered to be better

suited to medium to large businesses.

Companies

Under Australian law, a company is defined as a fictitious person created by charter, prescription or

legislation. It is also called a corporation. Because it is a ‘person’ separate from humans, a company is owned

by the shareholders, who hold its ordinary shares, with many of the economic rights and responsibilities

enjoyed by individuals. A company can sue and be sued, it can own property and execute contracts in its

own name, and it can be tried and convicted for crimes committed by its employees.

The corporate organisational form has several key competitive advantages over other forms, including

the following:

■ Unlimited life – Once created, a company has perpetual life unless it is explicitly terminated.

■ Limited liability – The company’s shareholders cannot be held personally liable for the company’s

debts.

■ Separable contracting – Companies can contract individually with managers, suppliers, customers

and ordinary employees, and each individual contract can be renegotiated, modified or terminated

without affecting other stakeholders.

■ Improved access to capital – The company itself, rather than its owners, can borrow money from

creditors, and it can also issue various classes of ordinary and preferred shares to equity investors.

Furthermore, the ownership claims themselves (ordinary and preferred shares) can be freely traded

among investors without obtaining the permission of other investors if the company is a public company –

that is, one whose shares are listed for trading in a public securities market.

The shares of corporate ordinary shares carry voting rights, and shareholders vote at an annual meeting

to elect the company’s directors. The directors include key corporate personnel as well as outsiders,

typically successful private businesspeople or executives of other major companies. The board of directors

is responsible for hiring and firing senior managers and for setting overall corporate policies. The rules

dictating voting procedures and other parameters of corporate governance appear in the company’s

constitution, the legal document created at the company’s inception to govern its operations. The

constitution can be changed only by a vote of the shareholders.

proprietary limited
company
A company form with between
two and five shareholders with
limited liability that creates an
organisational form separate
from individuals

company
A legal entity, owned by the
shareholders who hold its
ordinary shares, with many
of the economic rights and
responsibilities enjoyed by
individuals

corporation
In Australia, a legal entity set
up to conduct business and
regulated by the Australian
Securities and Investments
Commission (ASIC) under
the Corporations Act 2001.
A corporation can be limited
by share or by guarantee, or
be a no-liability company, a
proprietary limited company
or a private company. Also
referred to as a ‘company’

shareholder
An owner of ordinary or
preferred shares in a company

public company
A company, the shares of
which can be freely traded
among investors without the
permission of other investors,
and whose shares are
listed for trading in a public
securities market

board of directors
Elected by shareholders to
be responsible for hiring and
firing senior managers and
for setting overall corporate
policies

constitution
The legal document created
at the company’s inception to
govern its operations