Sources of Finance for Unincorporated and Incorporated Businesses

Accounting for
business

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Unincorporated business (Sole traders and partnership firms)...............................................3
Incorporated businesses (private and public limited companies)...........................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Company can raise the money through internal as well as external sources of finance.
Organisation which borrow the funds for more than one year is called long term source of
finance. There are multiple organisation like partnership firm, enterprise or sole proprietorship
needs fund according to her requirements. This fund is needed by an organisation for expansion,
diversification and for new innovation techniques (Bohle, and Greskovits, 2019).
TASK
Unincorporated business (Sole traders and partnership firms)
Unincorporated businesses, such as sole proprietorships and partnerships, cannot raise capital by
selling shares. These businesses also cannot sell debt securities. These businesses 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.
Difference between owners capital and borrowings
Ownership capital 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. 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 the company. By
contrast, interest must be paid on any form of borrowing, whether these companies are sole
proprietorships or partnerships, whether they are making a profit or making a loss. Loans must
be repaid. Debt equity is tax efficient capital compared to all forms of equity.
There are different types of internal sources of finance which is used by various
organizations which comes under the category of sole trader and partnership are described
below-
Retained earnings – It is one type of internal sources of finance for business because they are
the end product of running a business. The phenomenon is also known as ‘Ploughing Back of
Profits.’ Retained profits can be defined as the profit left after paying a dividend to the
shareholders or drawings by the capital owners.