Business Formation - Operation and Management

Running Head: Business Formation
BUSINESS FORMATION
Accounts II
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Business Formation
There exist different types of business ownership and each of these types have their own
advantages and disadvantages. Similarly, both partnership and corporation come up with their
attached merits and demerits.
Partnership is a popular business type wherein two or more people join together to operate
and manage the organisation (Anju, 1). There are various advantages of partnership like, low
start-up cost, more available capital (usually contributed by each of the business partners),
increased borrowing capacity, diverse views and ideas, tax advantage due to splitting of
income etc. this business type or set-up has certain disadvantages too like, partners’ unlimited
liability of business debts, risk due to mismatch in opinion, partners are liable for each other’s
actions etc. (Tasmanian Government, 2).
Corporation is a business type where entity usually exchanges ownership of the company in
the form of company’s stock or shares. The owners of the business prioritise the
maximisation of shareholders’ wealth or generating good return for its shareholders. Like
partnership and any other business type, corporation also has its advantages and
disadvantages. Firstly, in such an arrangement, owners are not personally liable for any of the
company’s debts so even in case of bankruptcy, shareholders/owners of company would not
be personally liable. Corporations cannot be closed or ended until and unless voluntary
liquidation does not take place. Therefore, if its members die or plans to leave the company,
they can easily transfer their share to someone else. Foremost benefit of having corporation
as a business model is the tax benefit. Owners are not taxed for the profit earned during the
year rather they are taxed as per individual slab rate and only on the dividends and salary
received from the company. The profit of corporation is taxed as per separate rate.
Corporation involves a lot of time and money which can be considered as its major
disadvantage. It is usually a lengthy process and also require the fulfilment of various legal
formalities like registration, MOA and AOA submission etc.
Since, the three partners are planning to open a brand-new health club together it would be
better to select partnership as their business type. In this case, each of the three members
would contribute capital and involve less start-up cost unlike corporation which involves a lot
of money. It would also motivate all partners to contribute equally for the completion of work
and reduce work-load. It can be started easily as it does not require the fulfilment of any
specific legal formalities like in case of corporation.
Every company finances its business through debt financing or equity financing or both.
Therefore, capital structure of the business mainly consists of debt and equity financing.
There exist many differences in both these sources of financing and their advantages and
disadvantages differ from company to company.
Equity financing refers to the process of raising money by issuing shares of the company to
the public in general. No company is liable to pay return to the shareholders every year but to
safeguard their interest company usually distribute dividend out of the total profit earned
during the financial year. In equity financing, the shareholders actually hold a part of the
company and enjoys the ownership to the extent of share held by them. Debt financing is
much like taking money on loan but in this case, company borrows money from the general
public and promises to pay back the principal amount along with the interest. Unlike equity
financing here the company is liable to pay interest to the debenture holders irrespective of
profit earned or loss incurred.
Equity financing actually dissolves the ownership of the company’s founder to the extent of
shares outstanding. However, in case of debt financing the lenders do not become the owners
of the company. In case of equity financing, company is not liable to pay a fixed amount to
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