Question

PLEASE ANSWER THE QUESTION ASAP

Scenario: Pretend that you and three friends run a small landscaping business. You are currently structured as a general partnership and want to expand your business so that you can attract and serve new clients. You also need to purchase additional equipment to provide your services and would like to hire a part-time accountant. You recognize that you need to increase capital in order to expand; you also recognize that you may need to change your business ownership structure.

Question:

1. Compare and contrast your options of raising capital as a general partnership vs. a corporation; in essence, discuss how owners raise the capital needed to expand under each structure.

Answer 1

Raising capital as a Partnership: Partnership is a form of business structure where two or more persons set up a registered firm by entering into a partnership deed. The parties to the agreement are partners and share profits and responsibilities in the business. All or some of the partners introduce capital in the business and all partners may share equal or varying shares in profits of the business. It's also important to note that partnership deed is required to be renegotiated every time there is a change in the ownership structure. One of the limitations of partnership form of business structure is the limited ability to raise funds. The sources that can be used to raise funds by a partnership are: • Additional capital by existing partners • Incorporating new partners in the firm and introduction of capital by them • Bank loans Raising capital as a corporation: Corporation or company form of business structure is the most sophisticated and professional form of conducting business. Though it requires significant amount of compliance to maintain a corporate form, but it provides great flexibility to conduct the various business functions, including raising capital. Also, corporate is the adequate form of conducting business to run a large business where constant expansion is being targeted. One of the main characteristics of a corporate form is its ability to raise capital. The investors invest capital in a company against issue of shares and there could be any number of shareholders in a company. The various sources of capital for a company are as follows: • • Private placement to institutions, Venture Capital, Private equity, Angel funding Initial public offering (IPO) Further public offer (FPO) Additional capital infusion by existing shareholders through a rights issue Bank loans, Issue of Debentures, Issue of Bonds, Issue of term deposits •

Conclusion and comment on the given scenario: In the given scenario, it is being targeted to expand, attract new clients, and purchase new assets. If the existing partners want to expand through the investment by them and their closed ones, i.e. the want to keep ownership between themselves and their close friends in future, they may continue to operate under partnership structure. However, if they plan to continue to expand in future and attract outside investors, it would be better to change into corporate form as it would allow more options and also be easier to maintain complex ownership structure as required when there are large number of investors in a business.