Corporate finance is the allocative financial structure of business administration, where all managers are in charge of analyzing tools to make an organization a best-performing brand. While choosing and identifying the best funding resources in terms of financial utilities, managers try to drive up the value of the company they work in and refine their skills in the management process. It is a strategic approach, as all involved participants try to anticipate and prevent all possible threats concerning company diminishing returns and ineffective allocative-productive efficiency. By increasing a company’s value, managers try to attract shareholders’ attention in order to expand the corporation borders and a joint-stock company. The major goal of corporate finance is to accentuate or maximize shareholder value. This financial area is essential for company managers as it is a beneficial driving force in terms of their individual skills and projects regarding efficient finance allocation. By a proper evaluation of all funding sources and requirements, company management might manage to achieve a profit-maximizing organization level with a high shareholder rate.
The Importance of Corporate Finance to Managers
Corporate finance is a financial area implying the company value highlighting the importance of its projects, funding programs, and shareholders’ involvement. Seru and Sufi (2021) claim that “the firm’s value is determined only by the value of its real projects” a firm introduces. Managers bear primary responsibility for these very projects, as corporate finance provides managers with a particular set of skills and knowledge to identify and analyze the possible corporate options. Managers are aligned with detecting corporate strategies that might help to increase the firm value. The primary manager’s objective is to understand and review future corporate steps regarding financing, and funding programs. Obviously, this category of knowledge manifestation is liable for efficient company performance, functionality, and overall results. Besides, managers understand the importance of corporate finance, as the penetration into this financial field stimulates managers to formulate and choose particular policies to increase and improve the shareholders’ wealth. A manager’s involvement in the finance distribution is a basis of stock-and-share organizational processes. Explaining corporate decisions is another profound objective, meaning giving clear-cut explanations to company workers about all financial procedures taking place in company adjustment.
Such a term as corporate social responsibility (CSR) implies participants’ desire to expand shareholder wealth. Moreover, mergers and acquisitions(M&A) are the basic components of CSR performed by workers inclined to facilitate and shape corporate social culture by attracting and inviting new shareholders or independent entities. Corporate culture is the basis of “stakeholder relations acts as a differentiation strategy that pays off when skilled managers engage in M&As, which typically prompt information asymmetries between managers and outsiders” (Doukas & Zhang, 2021, p.87). This statement implies that financial managers aim at positive post-merger returns as a final destination point of every single transaction or shareholders’ attraction. CSR implementation means making a company or firm more accountable and explainable for all members involved, a company organization itself, future stakeholders, and the public. CSR and corporate finance complement each other, as this sufficient combination meets company and shareholders’ needs. The representatives of these two facilities are managers who manage to make a company a top-performing brand with a high rate of stockholders involved and the future reassessment of financial strategies.
Corporate finance is a financial institute determining the way managers perform. Their performance regards generating cash that covers investors’ costs who provide the funding programs, fringe benefits, or capital. Corporate finance helps managers use particular tools to facilitate all financial flows or transactions acquired in the company process. By applying this strategy, managers can evaluate all possible economic projects that are the foundation of the company’s capital. In other words, managers are closely connected with corporate finance, as they stimulate, operate, and process the major financial deals. They use their knowledge of diverse financial data to choose the best solution for the shareholders’ attraction, retention, and firm value increase.
The Ownership Types a Company Might Have as it Evolves from a Start-Up to a Major Corporation
Every major corporation has its own path from a start-up to a company with established and organized facilities where all members participate in the working process and aim at company goal orientation. To become a top-operating company with a positive tendency for development, a company chooses its own style to distribute its charges and the stock ownership among company executives and investors. Ownership structure “is an important factor in corporate governance because it can involve decision-making and can play an important role in increasing CSR disclosure (Javeed & Lefen, 2019, p.3). It is evident that “the company’s ownership structure arises from a comparison of the number of shareholders in a company”, thus making good corporate governance where responsibilities and ownership are shared between individuals (Dewi & Wirawati, 2021, p.67). Besides, ownership refers to industrial enterprise implying a particular form of business possession. Individuals in these enterprises have their assets to distribute resources, determine policies, lay out strategic plans, and pay taxes. There are several ownership types a company might have in order to become a profit-maximizing firm. They are:
- A sole proprietorship.
- Joint Stock Company.
A sole proprietorship
A sole proprietorship or single ownership refers to an unincorporated business owned by one individual who pays a personal marginal income tax rate on benefits or profits from their company. It is the easiest way of business regulation, as one individual establishes and regulates their business strategies and scenarios. According to Memon et al. (2021), a sole proprietorship is “the easiest way of starting a business as it is simple to form” (p.274). There are no legal entities or governmental surveillance in this type of ownership to a great extent, as it is one-person governance.
Advantages of single ownership
- There is an organizational simplicity;
- There is no complicated establishment, as one person runs and conducts their business;
- There is a minimum level of the governmental interference;
- A business owner is free in the making-decision process;
- An owner enjoys all company profit by themselves;
- An owner is driven by their motivational incentives, as they are the only establishing representatives of their company processes.
Disadvantages of a sole proprietorship
- A company owner bears personal responsibility for all procedures undertaken in the company adjustment;
- A business might not manifest fat chances of efficient performance, as an owner has a limited amount of money, funding resources, and skills;
- There is a lack of possibilities to expand a business;
- An owner is liable for their debts and losses, as, in case of an owner defaults on obligations, a creditor might expropriate business ownership to offset their lent finances.
The partnership is another type of ownership aligned with sharing the owner’s responsibilities with somebody else, such as investors or other experts who possess extensive knowledge in different spheres, and skills. According to Musweu (2021), “each partner in the partnership can bind the other partners in a partnership for each contract or transaction they enter into” as partners are the compatible members of the partnership structure (p.3). Besides, in the partnership structure, “there are more than one person starting a business as double owners known as partners with the aim to earn profits and the entity” ( Memon et al., 2021, p.274). It is evident that in the partnership structure, all profits and benefits are shared between partners in accordance with a contract or an in-advance agreement. The money each partner has depends on their investments and preplanned negotiations.
The partnership has two subcategories as a general partnership and a limited partnership. The general structure is the case of the compelling force of partners’ incorporation, where partners influence each other. When it comes to a limited partnership, it is the financial policy where each partner has limited liabilities and bears responsibility for the sector they are assigned. In this case, partners act collaboratively for the final positive outcome of company performance.
Upsides of the partnership business structure
- There is more than one individual to be liable for all losses and diminishing returns;
- There is large capital availability to a company or a firm;
- There is a different approach to incorporation, as all participants have their own working experience they can rely on and operate, thus providing the multiple evaluations of company procedures;
- There is a definite brand and legal company label performing as a good source of advertisement;
- As a partnership company is a legal enterprise, banks can lend money easily to it;
- Success incentive is high.
Downsides of the partnership business structure
- There is a strong correlation of actions among partners; one partner’s internal misdemeanor might affect another partner’s performance;
- Due to different partners’ visions, experiences, and anticipations, this kind of organization suffers from a lack of stability and permanence;
- As a rule, partnership companies are unstable, and this is why debtors and investors hesitate to fund their money;
- Authority rights are divided among all partners involved.
Cooperative organizations are companies run by the state but performed as a single institute embracing the prominent partnership structure features. According to Abbasi et al. (2021), cooperative companies resort to a type of governance confirming shareholders’ interests that are “protected by practicing high standards of ethical and efficiency parameters” (p.83). Cooperative ownership is a democratic structure, as all participants are motivated to discuss company prospects. Discussions are held in the form of open, periodic meetings where shareholders or a board of directors debate or consider the taxation system and cooperative programs.
Advantages of cooperative ownership
- It is a democratic and flexible type of ownership;
- It operates on mutual partner assistance and promotes cooperation;
- The risks of black-marketing and stock holdings are diminishing;
- The government support might be in the form of monetary help;
- Daily commodities and necessities can be affordable and available.
Disadvantages of cooperative ownership
- There are risks of possible conflicts among partners in terms of making-decision processes;
- Members who perform as a whole system might like focusing more on personal performance rather than a company adjustment;
- Finances might be limited.
Joint Stock Company
A Joint Stock Company is the association of shareholders supplying their capital regarding carrying efficient and successful business. According to Maphosa (2021), the joint-stock company is held by “a separate legal persona which enables it to engage in transactions, sign deals and contracts, sue and be sued in the business realm separate from its owners.” Financing in this ownership type is limited, as it depends on issuing share increases, bank loans, and loans from industrial entities.
Merits of a Joint Stock Company
- There is a possibility to raise a handsome sum of money;
- There is a share transferability;
- Competent experts or classified specialists can join a company to counsel its participants;
- It is a stable way of ownership where flexible and efficient management is a number-one priority.
Demerits of a Joint Stock Company
- There are divided liabilities among shareholders;
- There are a few chances to have secrecy as a joint-stock company is a type of partnership;
- There is a high risk of fraud and information leaks;
- There is a possibility that shareholders and a board of directors might sell their shares to increase their personal profits;
- Only significant shareholders can manage a company.
The Less Common Forms of Business Ownership
There are several less common forms of business ownership, such as S-Corporation, B-Corporation, and Limited Liability Company (LLC); all these structures are aimed at small business ownership types. These ownership structures are not typical for business owners, but they have obvious upsides. As a rule, these ownership styles are preferred by small business enterprises and supported by diverse governmental taxation programs. The combination of legal taxation support and owners’ approaches is efficient for company performance.
S-Corporation is a particular type of ownership structure based on IRS tax election (Internal Revenue Service of the United States). It is a domestic partnership case eligible to get rid of double taxation (on shareholders’ behalf and corporation taxes). It is a major advantage of S-Corporation, as it passes its losses, corporate incomes, and credits to shareholders of the federal tax system. Besides, as the IRS tax election supports this kind of ownership structure, shareholders do not bear responsibility for debts or losses incurred by their organization. The primary responsibility of shareholders and their partners is the liability for passive income and build-in financial gains. S-Corporation is the best option for owners in case they want to increase profits and manage losses through their personal income tax.
B-Corporation is a less common type of ownership; it is a for-profit business with the same tax system as cooperative organizations. The leading indicators of this ownership are transparency and accountability. B-Corporation philosophy is to be driven by profit gain and public benefits production. The key merits of this ownership structure are the company’s accountability in terms of satisfying individuals’ general needs and getting financial profits in return. These corporations contribute to the public good and people’s well-being, as getting a profit is not their number one priority.
Limited Liability Company (LLC)
Limited Liability Company (LLC) is the last but not least less common type of business ownership. LLC is a hybrid kind of business maintained by a legal structure providing and stimulating the corporation’s limited responsibility for debts and losses coupled with partnership flexibility. This kind of ownership might be run by one person, depending on the state, and IRS tax forms might support this individual. The main advantage of this partnership is that it is the embodiment of different ownership styles maintained by governmental support.
Company performance consists of several mechanisms of its adjustment, promotion, and advancement. Corporate finance is in charge of financial company expansion in terms of financial flows and company revenue. All managers interacted with this financial structure, and understand its importance, as corporate finance allocates diverse resources for shareholders’ attraction and further their retention. The last but not least objective regarding an organization’s performance is the ownership style choice. The proper business ownership structure is a profound solution aligned with company efficiency.
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