We will write a custom Research Paper on Corporate Finance and Business Ownership Types specifically for you
301 certified writers online
Corporate finance is an essential element in the successful operation of an organization. Aside from the operational calculations and analytical capabilities it provides for the accounting department, it facilitates skills and knowledge applicable in many managerial practices. Specifically, it provides a basis for sound decision-making and contributes to the clarity of goals and objectives. One area of corporate finance that is essential for managers is the type of business ownership. Acknowledgment of advantages and disadvantages of each form may be crucial for achieving excellent performance and minimizing undesirable expenses.
Importance of Corporate Finance
Corporate finance is a highly specialized set of activities that allows for accurate and reliable evaluations of an organization’s financial performance and modeling of likely outcomes for ongoing projects. However, its influence can be traced beyond the strictly utilitarian domain. Basically, since corporate finance is meant to assist the decision-making process, understanding its fundamental principles is both important and desirable for everyone within the company who is expected to make decisions and substantiate them—in other words, all managers.
In the most basic terms, corporate finance is aimed at optimizing expenses and controlling profits in order to maximize the latter—in other words, assessing the spending and revenues of an organization (Ross, Drew, Walk, Westerfield, & Jordan, 2016). It can be said that at least a part of the responsibilities of all managers covers the described activity. Therefore, it is reasonable to expect that those who show a comprehensive understanding of corporate finance will excel at their duties and achieve higher results. While there may be no apparent direct connection, all managerial decisions are eventually reflected on the company’s balance sheet. Thus, any given field, from human resource management to management of supplies, requires at least basic corporate finance awareness in order to yield superior results.
Another aspect required for successful managerial performance is the ability to provide a rationale for decisions. While it is certainly possible that certain managers possess enough experience to intuitively make the best decision, a significant part of their success depends on their ability to convince their subordinates and/or superiors of its feasibility. The easiest example of the justifying of necessary expenses by providing convincing evidence of eventual profits. In addition, reasonable explanation backed by approachable financial calculations may decrease employees’ reluctance to accept changes and, by extension, increase their involvement. In addition, a better understanding of financial nuances by employees can lead to a clearer understanding of goals and, by extension, increase overall organizational performance (Parkes, 2014).
Finally, a better understanding of corporate finance contributes to the leadership qualities of a manager through obtaining a clearer vision of the company’s goals and the ability to communicate this vision to the employees in a comprehensible way (Parkes, 2014).
Ownership Types of a Company
One of the most common types of ownership is a sole proprietorship: a form of ownership where the business is owned by a single individual in its entirety. This type is very popular as it requires dealing with very few formalities and legal regulations to establish and operate. It also offers the simplest taxation scheme because all business revenues are declared as the personal income of the owner and are therefore exempt from corporate income taxation (Krentzman, 2013). Most importantly, in a sole proprietorship, the owner is in charge of the business and has control of overall business operations. However, it should be noted that in this type of ownership, the proprietor has unlimited liability—that is, all obligations created during operation fall under the owner’s responsibility. This disadvantage makes sole proprietorship the riskiest option since all debts are paid from the personal funds of the owner. In addition, for this type of business, the funding options are limited to those available to individuals (personal loans and savings), which makes raising capital difficult (Krentzman, 2013).
Another type of ownership is a partnership, where several individuals operate the business together. Depending on the type of partnership, liabilities and profits are shared either according to an agreement (general partnership) or according to the characteristics of their investment (limited partnership). The advantages of a partnership are largely consistent with those of a sole proprietorship, with one notable exception—it offers more options for raising capital, thanks to the involvement of more personal funds and the option to add limited partners who could offer additional investment return for a share of the profit. However, general partners still have unlimited liabilities, which means they bear financial and legal risks. In addition, the extent of responsibilities and liabilities between partners is ultimately determined by the agreement, which, if improperly constructed, may lead to inconsistencies and disputes. In addition, on occasions when debts cannot be covered by one of the partners, they can be collected from the other general partners. Finally, this type of ownership is vulnerable in a situation where one of the partners dies or decides to withdraw from the partnership (Freeman & Freeman, 2015).
A corporation is a form of business owned by shareholders. It is distinct from the previous types in that it is an entity that essentially has its own liabilities separate from those of the shareholders. This fact constitutes the corporation’s biggest advantage—the corporation can act on its own in seeking funding and can become a target of legal action instead of its owners. Therefore, it is a much safer form of ownership. Besides, the rules for shareholder liability and transfer of ownership are clearly defined for a corporation (Viney, 2015). On the other hand, corporations are more tightly regulated and controlled by the authorities and are more complex to establish and operate. The profits of corporations are also more heavily taxed, and shareholders pay personal income taxes in addition to corporate tax (Krentzman, 2013).
A limited liability company is a form of ownership that attempts to alleviate the disadvantages of a corporation while retaining its advantages. Its owners have limited liability, pay fewer taxes, and can fully participate in the management process, which ensures the simplicity and flexibility of a partnership. However, it is still more complex and costly to establish than a partnership and has several regulation limitations (e.g., transition to a publicly-traded business).
One of the less common forms of business ownership is cooperation, also known as a co-op. This form usually requires a common goal and commitment on the part of the participants. This type is largely informal and relies on the goodwill of the stakeholders (Mazzarol, Reboud, Limnios, & Clark, 2014). Its advantages include lack of restrictions, low cost of operation, and significant benefits if properly established.
A nonprofit (not-for-profit corporation) is another ownership type rarely used in business, primarily because it aims at fulfilling purposes other than the generation of profits (e.g., charity, education, or science). It offers advantages of tax exemptions for received funds and provides tax-deductible donations for donors (Vaughan & Arsneault, 2013). However, this form of ownership is only applicable to a limited number of organizations.
Freeman, S., & Freeman, J. (2015). Financial accounting: A practical approach. Frenchs Forest, Australia: Pearson.
Krentzman, H. (2013). Business management for profit essentials. Piscataway, NJ: Essentials.
Mazzarol, T., Reboud, S., Limnios, E. M., & Clark, D. (2014). Research handbook on sustainable co-operative enterprise: Case studies of organisational resilience in the co-operative business model. Perth, Australia: Edward Elgar Publishing.
Get your first paper with 15% OFF
Parkes, M. (2014). Business facilitation: An essential leadership skill for employee engagement. Leiscestershire, England: Matador.
Ross, S., Drew, M., Walk, A., Westerfield, R., & Jordan, B. (2016). Fundamentals of corporate finance. Canberra, Australia: McGraw-Hill.
Vaughan, S. K., & Arsneault, S. (2013). Managing nonprofit organizations in a policy world. Fullerton, CA: CQ Press.
Viney, C. (2015). Financial institutions, instruments and markets. Canberra, Australia: McGraw-Hill.