Discussion and Two Replies
Learning Goal: I’m working on a accounting discussion question and need an explanation and answer to help me learn.
1) Explain the different types of corporations and offer examples of each type. Then explain the various methods for raising capital and include examples of situations when each method would be best. (25 sentences)
2) Discuss the pros and cons of each type and method. (15 sentences)
1.1) A corporation separates a business from its owners. Corporations exist as an entity just like an owner but shield the actual owners from personal liability. The corporation can be held legally liable, pay taxes and make profits. LLCs provide protection to owners but not as much as corporations do. A corporation can sell stock and have shareholders. If the shareholders leave the corporation can still exist. A corporation is a good choice for a business that operates at risk so if it fails the business owners wont lose their personal assets (SBA,2022).
There are two main types of corporations. There are corporations that intend to make a profit and there are non profit corporations as well. The main difference is that with non profit corporations like churches and public schools they can receive a tax exempt status for the work they do which usually benefits the public. A standard for profit corporation like an airline or manufacturing company will pay taxes and in some cases twice, once when the company makes a profit and again when it pays dividends to its shareholders (SBA,2022).
Corporations can raise money either through incurring debt or through equity financing. The first is simply borrowing money or issuing corporate bonds. Equity financing is selling shares of the business to raise money which can be done publicly or privately (Boyte-White, 2022).
There are various types of corporations which represent the internal structure of the business and how they operate and function.
Proprietorships are typically businesses with one owner who assumes sole responsibility for the business, including all profits and liabilities (Finkler, 2017). This structure places the business owner personally responsible for the liabilities incurred by the business, and all business income is reported on the owner’s personal tax form (Wolters, 2020).
- Proprietorship based business are typically small, local businesses, such as, local barbershops, nail salons, etc
Partnerships are similar to proprietorships but are owned by two or more people (Finkler, 2017). In partnerships the company’s liability also becomes a personal liability for the owners, with the exception of LC/LLC structures (Wolters,2020).
- Partnership based companies can include businesses such as, law firms, private practice medical offices, etc.
Raising capital for both proprietorships and partnerships is fairly limited to personal investments made by the owner(s), their family and or friends, as well as, back loans (Finkler, 2017). Bank loans for these types of businesses are primarily dependent on the personal credit history of the individuals’ themselves (Wolters, 2020).
Not for profit organizations are not structured with a process of distributing profits to owners, investors or shareholders (Finkler, 2017). They often rely on donations to raise capital funds and also partake in significant debt financing to gain capital. Any profit this type of organization may produce is not given to shareholders or owners, they put it back into the organization to update materials or acquire new equipment.
- Charitable organizations, foundations, and hospitals are some examples of organizations that are structured as not-for-profit.
For profit organizations are businesses created with the goal to make money. Companies in this category are able to obtain “limited liability” status which does not hold the owners personally responsible for the liabilities owed by the business (Finkler, 2017). Organizations in this structure have more options in how to raise capital. Common stock is large resource of gaining capital in the beginning stages, investors who purchases common stock in a company become owners who own a portion of the assets, are eligible for dividend payouts (Finkler, 2017).
- There are numerous examples of for profit businesses that include, airlines, manufacturers, retail stores, etc.