Question

Mention three major types of businesses and how they raise finance.

Answer 1

The  three major types of businesses are :-

(i) Sole Proprietorship

(ii) Partnership

(iii) Corporation.

(1) Sole Proprietorship - Sole Proprietorship is a business owned by one person. For example Retail stores which we generally comes across Like General Stores, Garment Stores etc, comes under this category.

Sole Proprietorship Raises Finance Mainly from:-

(a) Personal Capital - The sole trader can invest his own savings into his business.

(b) Bank Loans - Sole Proprietor can approach banks for lending funds for his business, This could include a business loan, a credit line, credit cards, trade credit and a mortgage.

(c) Retained Profits - a sole trader may opt to retain the portion of his earnings for business expansion.

(2) Partnership - A legal form of business operation between two or more individuals who share management and profits. Each Partner is an agent as well as principle of other partners.

Some Major Sources of Finance for Partnership are :-

(a) Personal Capital - Each Partner can invest his own savings into his business in certain Proportion.

(b) Bank Loans - Taking a loan from a bank amounts to yet another source of funding available to partnerships.

(c) Retained Profits - The profits can be either withdrawn by the owners of the firm or reinvested to expand the business. If partnership members decide to keep the profit for the company, this source of funding is called retained profit.

(3) Corporation or Company - A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.

Some Major Sources of Finance for Corporations are :-

(a) Share Capital or Equity Shares - Corporations can raise finance by issuing Equity Shares to Public.

(b) Debenture / Bonds - Corporations can raise finance by issuing Debenture / Bonds to Public. It is a Loan for the Company from Public.

(c) Term Loans from Financial Institutes, Government, and Commercial Banks.

(d) Medium Term Loans from Financial Institutes, Government, and Commercial Banks.