Answer

Sources of Finance in Business Structures

            In a given jurisdiction, there are many business structures which are legally recognized. Legal structures within an organization are key determinants of the activities that such an organization tackles including raising revenue, proper operation, and the amount of taxes it should pay. Essentially, the choice of business structure is fully dependent on the needs and ambitions of the business owners. The business structures are classified as either sole proprietorship, partnership, corporation or Limited Liability Company. For any given organization to expand, it depends on long term sources of financing such as equity shares, debentures, mortgages, and government debts to achieve their goals and ambitions. Financial sources benefits the business structure and brings disadvantages as well based on the goal of the business. Therefore, this paper examines the sources of external long term finance for business structures by evaluating each in terms of their differences and similarities.

A corporation is a legal entity that is separate from its owners. Despite being a separate entity from its owners, a corporation is eligible for taxation.  Equity shares are the leading sources of long term finance for large business entities such as corporations. However, not all large business entities can obtain their long term finances through equity shares since this is controlled by several legislations. A basic characteristics of equity share as an external source of long term finance is the sharing of ownership rights and therefore the present rights of the shareholders are partially diluted (Schell, 2020). Moreover, as long term source of finance, equity shares are considered expensive as opposed to debt finance since the return in the form of bonus shares or dividend offered to shareholders are not tax deductible (Mayer, Schoors & Yafeh, 2005). In addition, it is a challenge to raise this capital since lengthy and stringent formalities are involved. The investors are also required to have trust in the company before issuing equity shares.

            Corporations can equally obtain their long term finances through invoice finance. Invoice financing enables corporations to obtain finances against the values of invoices due from clients (Litvak, 2009). Intuitively, the corporation can receive approximately 85% of the value immediately less the finance charge when customer pays the invoice. Invoice finance is considered a better option when a business entity has several corporate customers who tend to pay after a longer period. Nonetheless, while invoice finance is a better alternative for finance, it is only available for large business entities such as corporations with a solid track record of generating revenues and receiving prompt payments by customers (Schell, 2020).

            A Limited liability company is a business entity where the owners are not personally accountable for the liabilities or debts that the business have (Schell, 2020). It is a hybrid entity that combine the features of corporation with those of sole proprietorship or partnership. To externally obtain their long term finances, limited liability companies often use debentures. As a debt, debentures are considered a relatively affordable mode of finance as opposed to equity. Moreover, it hardly shares control with investors as in the case of equity shares because the interest that debenture holders pay is tax deductible (Mayer, Schoors & Yafeh, 2005. However, a major similarity between equity shares and debentures is that the process of obtaining them is tedious and full of lengthy and stringent legislations. Debentures and equity shares are given to the common public and thus appropriate legislations must be fulfilled. Similar to equity shares, debentures involve charges of issuing and they are equally collateralized by certain assets of the organization.

            In addition to debentures, limited liability companies can externally obtain long term finances through preferred stock. Abbasi, Wang and Abbasi (2017) postulated that the preferred stock shares have almost the same features as debt and equity stocks. They are known as preferred since they have the priority over common equity shares with regards to capital payments, as well as, capital during liquidation.

Partnership is a business structure owned and operated by two or more people. In this business unit, all partners are required to contribute to all aspects of the. Partnership can externally obtain long term finance through term loan. Intuitively, the features of a term long resemble those of debentures with the exception that it is cheaper in terms of issuance since it is issued by certain financial institutions (Dungan, 2017). The banks often conduct a critical analysis and evaluation of the business’ financials and future plans to establish the capacity of the business to service their debts.  Similar to debentures and equity shares, these loans have some collateral attached to them especially assets. Secondly, partnerships use venture capital as an external source of long term finance. Venture capital is similar to equity shares except that in the former, investors are different group of individuals. Commonly known as venture capitalists, they often invest in a newly established business entities such as partnerships at early stages and conduct a thorough assessment of the business before investing. However, these venture capitalists exit the business entity once the company begins getting a better valuation (Dungan, 2017).

Sole proprietorship is a business entity operated by a single person and the owner cannot be separated legally from the business (Allen & McCluskey, 1991). Sole traders can use start up loans to externally obtain long term finances. This is a personal loan supported by the government available to persons intending to start or expand their businesses (Abbasi, Wang, & Abbasi, 2017. The successful applicants not only receive loans but also get a one year business training and mentoring free of charge. The major difference between start up loans and other sources of finance already discussed is that it besides the finance, the business is offered mentoring and training services for at least sole proprietors can equally obtain their long term finances externally through leasing of properties or hire purchase. Settling on hire purchase or lease option as opposed to paying the full amount to individuals supplying the goods can assist businesses delay its cash payment that is equal to having its items financed.

In conclusion, all business and investments require money to start and operate. Sourcing of finance is key to growth of any given business. Although there are different types of business structures, they all require good source of finance for expansion. In sole proprietorship, the owner may struggle financially to outsource adequate finance due to lower assets rating compared to the other business structures. Similarly, partnership and corporation can get loans based on the assets. In case these structures combine their assets as one, financial institutions such as banks can have more assurance thereby giving the business structures to expand the business.  More importantly, limited liability protects the owner from losses and lawsuits. Moreover, it retains benefits of a partnership. As already discussed, all business structures require funding to expand considerably. Intuitively, all these business structures can benefit from equity, bond and government loans. The only difference lies with the limited liability in which the owners cannot be directly questioned when it comes to debt collection. In this structure, the business owners are required to keenly pick a long-term source of finance that fits their business needs.