Can private corporations issue convertible bonds?

By Ken Clark AAA
A:

The first step to answering this question requires defining the term "private corporation". Many times, the term "private corporation" refers to a privately held company that is either a sole proprietorship (one owner) or a partnership (multiple owners). Other times, it refers to a business that's actually incorporated under state laws, but not traded on any exchange or by over-the-counter market makers.

In the instance of a truly private company that is owned by one or multiple people, convertible bonds cannot be issued. The reason has less to do with any laws against privately held companies issuing bonds and more to do with the fact that no shares of stock exist into which to convert the bonds.

On the other hand, a closely-held subchapter S or C corporation, which does not trade on any exchange, theoretically may issue convertible bonds if allowed by its corporate charter and state laws. The feasibility of executing a bonds issue of this kind is another matter, however, because many closely held corporations might have only 100 shares of stock outstanding, if not less. It is not unheard of for an owner or local investor to lend smaller corporations money in the form of bonds that come with a convertible feature. However, this usually is carried out as a means of protecting the lender by permitting ownership in the company if it fails to repay the loan.

(For more on this topic, read Convertible Bonds: An Introduction and Should You Incorporate Your Business?)

This question was answered by Ken Clark.

RELATED FAQS

  1. What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...

    Find out how companies and managers use hurdle rate, or MARR, and internal rate of return, or IRR, to evaluate projects and ...
  2. What is the rationale behind the effective interest rate?

    Read about the reasons why market actors identify the effective interest rate as it pertains to investing, lending and accounting.
  3. What are the advantages to structuring a business as a master limited partnership ...

    Learn about master limited partnerships (MLPs) and their unique tax treatment, which may make them beneficial for certain ...
  4. Should I purchase a master limited partnership (MLP) in my retirement account?

    Learn why investors may have to pay taxes on dividends from master limited partnerships, or MLPs, held in individual retirement ...
RELATED TERMS
  1. Public-Private Partnerships

    A business relationship between a private-sector company and ...
  2. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
  3. Next Generation Fixed Income (NGFI)

    Next generation fixed income is an innovative approach to investing ...
  4. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
  5. Impact investing

  6. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...

You May Also Like

Related Articles
  1. Professionals

    Beware: These Bond Funds Act Like Stocks

  2. Mutual Funds & ETFs

    Pros & Cons Of Bond Funds Vs. Bond ETFs

  3. Mutual Funds & ETFs

    Pros and Cons: Preferred Stock ETFs ...

  4. Bonds & Fixed Income

    African Sovereign Debt: Risks and Rewards

  5. Fundamental Analysis

    How has Larry Page's vision for Google ...

Trading Center