External Long Term Finance for Unincorporated and Incorporated Businesses
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Added on 2023/06/07
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This report analyzes the external long term finance available for unincorporated and incorporated business entities. It further elaborates the various external long term sources and similarities and dissimilarities among them with regards to partnership, sole traders, public and private companies.
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Accounting for business
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Table of Contents INTRODUCTION..........................................................................................................................3 MAIN BODY...................................................................................................................................3 Unincorporated businesses (sole traders and partnerships)........................................................3 Incorporated businesses (private and public limited companies)...............................................4 CONCLUSION...............................................................................................................................5 REFERENCES................................................................................................................................6
INTRODUCTION Accounting for business explains how the transactions are being recorded and how the financial information is understood and organised by businesses. Accounting is about getting a clear view and understanding of financial position of business. It tells whether the business is making profit or not, information about the cash flow, the current position of business' assets and liabilitiesandaboutthepartsofbusinesswhicharemakingmoremoneyandprofit (Blommestein). This report analyses the external long term finance available for unincorporated and incorporated business entities. The report further elaborates the various external long term sources and similarities and dissimilarities among them with regards to partnership, sole traders, public and private companies. MAIN BODY External sources of funds are those type of sources by which finance is raised from outside the entity. For instance, reserves is an internal finance source, whereas the loans from bank is an external source of finance. On the time period length basis, the sources are divided into long term and short term sources of finance. Long term sources of finance includes equity shares, debentures, term loans, venture capital, etc. Short term sources includes bank overdraft, working capital loans, trade credit, debt factoring, etc. Incorporated and unincorporated business entities:When a company has an entity separate from its owner and has natural rights to it, it is known as an incorporated business entity. When the owner of the company and the entity are the same and all consequences are the personal responsibility of the owner, this type of entity is known as an unincorporated entity. This type of companies are typically single owners or partnerships. The fundamental difference between an incorporated and unincorporated company is how the owner takes over the company's activities (El-Abbasy and Zayed, 2020). Unincorporated businesses (sole traders and partnerships) Unincorporated entities such as sole proprietorships and partnerships, cannot raise capital by selling shares. They also cannot sell debt securities. They can borrow money from family and friends, or use the owner's profits and savings. Partners must raise additional capital. Lenders are
reluctant to lend to small businesses unless the owner provides a personal guarantee backed by their assets. Government grants are offered to support new and small businesses. Distinction between borrowed capital and capital from owners Capital from owners is the money invested in the company by the company's internal managers such as owners and shareholders. Debt capital is capital raised by a company such as bank loans, borrowings and corporate bonds taken out by financial institutions and banks. The owner's capital is permanently invested in the company. Debt equity is invested over a period of time. The reward for the owner's invested capital is the annual profit and this capital stays with thecompany.Bycontrast,loansmustberepaid,whetherthesecompaniesaresole proprietorships or partnerships, making a profit or making a loss. Debt equity is tax efficient capital compared to all forms of equity(Ferraris and Couturier, 2018). Incorporated businesses (private and public limited companies) When a company has an entity separate from its owner and has natural rights to it, it is known as an incorporated business entity. Small businesses consider incorporation for specific reasons consisting of expansion or liability protection(Khattak and Clauß, 2021). A distinction between two long-term sources of capital: equity capital and other forms of debt capital (bank loans and debt securities) Shares are issued by a limited liability company to raise corporate capital from the market. The company sets limits on maximum authorized share capital in its Memorandum of association. The paid-up share capital is shown in particular on the company's balance sheet. A private limited company is prohibited from selling its shares to the public. They can invest their own capital, funds provided by friends and family, or borrow from financial institutions. Public companies are not prohibited from selling their shares to the public. They issue shares on public exchanges and the first offering is called IPO. Share capital is a permanent form of capital as it is not repaid until the company is liquidated(Maher and Aquanno, 2020). No interest payments. Income from holding shares comes in the form of dividends. The amount of the dividend is determined based on the profit generated by the company. The risk associated with this type of source is that the company's ownership may be diluted to some extent, which can be good or bad
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for the business. Companies that haven't made a profit in a year can refrain from paying dividends. This is an advantage associated with this type of funding. Debenture is the long-term sources of debt issued by private companies to raise funds. They are usually issued at higher interest rates and are unsecured. This is a risky means of borrowing money. Debt securities are included on the balance sheet under the long-term debt heading. Debt securities pay investors a regular interest rate or yield. In case of liquidation or bankruptcy, the bonds are paid out in front of the shareholders. CONCLUSION The above report concluded that determining the appropriate source is a critical business decision made by the head of financial management. Choosing the wrong source can increase costs and directly affect the viability of your project. Wrong decisions can affect smooth business operations. Business organizations have different sources of funding to start their business, or expanding the business or even the mergers. The report has explained the various sources that are available to incorporated and unincorporated business enterprises. It has also clearly explained the similarities and dissimilarities in raising the finance from different type of sources.
REFERENCES Books and Journals Blommestein, H.J., PART III Creating a Sound Financial Structure. InBuilding Sound Finance in Emerging Market Economies. International Monetary Fund. El-Abbasy, M.S. and Zayed, T., 2020. Finance-based scheduling multi-objective optimization: Benchmarking of evolutionary algorithms.Automation in Construction,120. p.103392. Ferraris, A. and Couturier, J., 2018. Big data analytics capabilities and knowledge management: impact on firm performance.Management Decision. Khattak, M.S. and Clauß, T., 2021. The role of entrepreneurial finance in corporate social responsibilityandnewventureperformanceinanemergingmarket.TheJournalof Entrepreneurship,30(2). pp.336-366. Maher, S. and Aquanno, S.M., 2020. A New Finance Capital? Theorising Corporate Governance and Financial Power. InRudolf Hilferding(pp. 129-154). Palgrave Macmillan, Cham.