Question

Jeff comes to consult with you about an idea he has.  He tells you that he does not have a lot of cash to pay but if you help him, he will compensate you with equity in the company.  He talks about a crazy website were individuals can buy and sell books online, something called “Amazon”. Knowing that the book industry is a multi-billion-dollar industry, you agree. Jeff tells you that he needs to form a business entity for his business idea. He wants a company that he can grow while still keeping a close eye on his investors. Jeff has big dreams that that company will one day be a multi-billion-dollar company that sells more than books. Jeff wants the most liability protection possible while still avoiding as much taxes as possible.

Which duties come with the business entity you chose?

What would your answer be if Jeff told you that he needed the most amount of investments possible and that taxes did not matter to him?

Answer 1

In the given scenario, Jeff wants to be consulted about his business. This business is about online business of books as book industry is multi-billion-dollar industry.

Jeff has two option to finance his company-

1. Equity finance
2. Debt finace

Equity finance is available at cheaper rate as compare to debt finance. Company can declare annual dividend, if it makes profit and tax need to be paid on such profit.

Debt finance is costlier then equity finance and company need to pay fixed amount of interest whether business is in profit or loss. But Company can claim deduction on interest paid to it's investors. As a result, less tax has to be paid.

If Jeff wants to avoid as much tax as possible, he should go for debt finance as he can claim deduction on the interest paid to it's investor and avoid tax to that extent.

If Jeff wants to the most amount of investment possible and tax does not matter to him, then he can go for equity finance as he can raise entire amount through equity in cheaper rate and he need to pay tax on it's profit.