Business Formation Report: Health Club Business Financing Strategies

This report provides a comparative analysis of different types of business ownership, specifically focusing on partnerships and corporations. It discusses the advantages and disadvantages of each structure, such as low start-up costs and diverse perspectives in partnerships versus limited liability in corporations. The report then delves into financing options, comparing debt and equity financing, highlighting their respective benefits and drawbacks, like fixed interest payments in debt financing versus ownership dilution in equity financing. The report recommends a partnership structure and debt financing for a new health club business, emphasizing the ease of setup, lower initial costs, and the potential to attract investors. The analysis is supported by references to relevant academic research and government resources.

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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Business Formation
the shareholders and if business of the company ceases it is not required to pay back the
shareholders’ amount. On the contrary, no matter what happens company has to pay the
agreed interest to the debenture holders. Even in case of business failure, an entity has to pay
the back the principal along with the interest amount to the debenture holders. These
debenture holders actually have a charge on the company’s assets whereas no such case is
with equity financing. Equity financing is suitable for those company whose operations are
vast and require a huge amount of capital investment and debt financing is suitable for small
and medium sized companies.
Therefore, it is advised that Donna Rinaldi, Rich Evans, and Tammy Booth should use debt
financing to finance their business of opening a brand-new health club together. Debt
financing involves a less cost to raise money as compared to equity financing which requires
a huge cost. At present, it is very hard for the owners to raise finance through equity because
they are at the initial stage of their business. It is hardly possible that any person would like to
take any risk associated with new business. The partners should choose debt financing to
raise money as this would attract the investors to lend money with the hope to receive a fixed
amount of interest. It has also been observed that the start-up has progressed a lot in terms of
revenue and survival when used debt financing over equity financing (Cole and Sokolyk, 3).
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Business Formation
References
1. Kahal Anju, 2017, Limited Liability Partnership: An Emerging Business form for
Entrepreneurs, http://www.indianjournals.com/ijor.aspx?
target=ijor:ijemr&volume=7&issue=3&article=118
2. Tasmanian Government., 2019, Partnership – advantages and disadvantages,
https://www.business.tas.gov.au/starting-a-business/choosing-a-business-structure-intro/
partnership-advantages-and-disadvantages
3. Rebel A. Cole and Tatyana Sokolyk, 2018. Debt financing, survival, and growth of start-
up firms, https://www.sciencedirect.com/science/article/pii/S0929119916302425
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