Alternatives to the Corporate Form

During the 1980s a few companies elected to change their organizational form from that of a corporation to some other form. Although such changes do not affect the control of assets, they do represent a significant change for the business, so they are usually included in discussions of restructurings. Tax savings stimulated some companies to create royalty trusts in the early 1980s. Later, a number of firms established master limited partnerships (MLPs). In royalty trusts and MLPs, pre-tax net operating profits go directly to shareholders (called unit holders in MLPs), where investors pay tax on the profits received. Managers operate a set of existing assets but rarely retain funds to invest in growth. Often MLPs contain natural-resource assets such as a paper company’s forestlands or an oil company’s petroleum reserves. MLPs also hold specific assets or activities of some companies. For example, a number of research-and-development MLP exists. Companies want to separate the risk of their research efforts from the rest of the company and use the MLP for this separation. These transactions occur only occasionally, but they point out how corporate managers and their financial advisors constantly look for better ways to organize a company’s activities.