Question

Select one business structure and how the use of that business structure would impact the financial management of that particular company.

Briefly summarize how this financial management approach would differ in the other business structures.

Answer 1

The business structure selected is "Sole Proprietorship". In this form of business structure, all the business related decisions are taken by the owner/proprietor. All the risks are assumed by the owner. Similarly, all the rewards/benefits accrue to the proprietor. The capital is mostly contributed by the owner. It may be difficult for a proprietor to obtain loans/debt financing from banks and financial institutions because of its unstructured form. The proprietor may borrow funds from friends and relatives to meet business requirements. If the business idea is truely unique, the business owner might be able to procure funds from a venture capitalist who in turn may either demand a share in business or a very high rate of return on his/her investment in the business. The funds generated from day to day business operations are used to meet the working captial requirements. The net profit may be retained by owner at the end of the year or reinvested (in full or partial) to expand the business.

The other forms of business structures include partnership firms and companies. Unlike an unregistered partnership firm, where the capital is mostly contributed by the partners, it is easier for a registered partnership or LLP (limited liability partnership) and business corporation to secure loans from banks and financial institutions in addition to capital contributed by partners/owners. A business corporation, if successful, can raise also huge amount of capital by issuing shares to third parties and transferring a part/portion of ownership to investors. The profits generated by a corporation may be distributed to investors in the form of dividends or retained in the business to finance expansion/growth projects or reduce the proportion of debt (if any) in the capital structure. The financial management may appear to be more structured in case of registered partnerships or LLP and business corporations as compared to a sole proprietorship.  All the business and financial decisions will have to be taken in the best interest of the firm and shareholders (in case of a corporation) and not for personal gains/benefits.