Company management Tax policy bankruptcy startup

0 Comment

The stage in which a company is at its life cycle influences the type of financial structure a firm uses. When a company is starting out it uses angel investors, personal money, and family loans to start a venture. The reason that start-up companies are limited in their selection of financial structure is because the company does not have a credit history. Once a company begins to mature they have more options available to them. For example a company that has been established for a few years can qualify for bank loans. An established firm that needs large amounts of money should start the process to becoming a publicly traded enterprise. Public companies can raise money by selling stocks. They can also raise money in the money markets through the sale of corporate bonds. 2. The tax policy of the state influences a lot in corporate capital management. It is preferable to do business in locations in which tax brackets are lower. In the United States different states have different tax bylaws that influence capital projects. It is always preferable to have lower taxes since taxes are an outflow of money that increases the cost of the project. Planning for taxes has some similarities to planning for financing policies. A financial manager has to look for ways to minimize cost in term of its tax planning. Choosing the right location can lower a project’s tax costs. In our globalized economy choosing foreign locations is a viable strategy to minimize tax expenses. 3. It is always difficult to go through a bankruptcy in business. I also had a family member that had to file a $135,000 bankruptcy because his business idea failed. He signed the big business loan giving his personal guaranteed which means that when he filed bankruptcy he had to so based on a personal bankruptcy. It has been 5 years since this occurred and my brother has still not recovered economically. His major is in accounting and finance. A few years ago when he when to some job fairs the recruiters told him that he should seek a new career because a bankruptcy in accounting is career suicide. Having a bankruptcy in accounting is the equivalent of having a criminal record. My brother is currently trying to study to become a chef. 4. Start-up companies have difficulty raising capital because they do not have an influx of cash coming due the fact that revenues are cero or very low. Another reason start-up companies do not have access to capital easily is because of a lack of credit history. Credit for corporations follows the same logic as individual credit. It is always hard to obtain credit when a company is starting out. These start-up companies can get credit easier from governmental institutions that have loan programs for small businesses. Sometimes big companies are willing to buy a company in bankruptcy because they want to acquire the assets of the firm or because the firm believes that they can turn around the operation with their expertise. 5. I agree with you that changes affect the financial structure of corporations through the passage of time. Good companies want to continue to evolve and grow. To achieve those goals corporations become public enterprise by going through an IPO process. Becoming public allows companies to raise money in the equity markets by selling stocks and in the money markets by selling corporate bonds. If a company reaches the bankruptcy stage they run out of options and the firm has to close down operations. There is a chapter in bankruptcy that allows companies to file bankruptcy and continue in business because the chapter allows for renegotiations of the old debt 6. The reason that I believe debt instruments are used more as firm mature is because of the credit history that the firm builds up. After a minimum of three years of operation with positive profits firm normally qualify for credit from banking institutions. A way to eliminate bank bureaucracy and obtain financing is by selling corporate bonds in the money markets. Firms such as Moody’s rate the bonds of public corporations and governmental institutions. 7. The most glaring disadvantage of using equity financing is that the owners give up control of the company. It is always preferable to keep at least 51% of the equity in the hands of the founders. This is the ideal scenario, but as firms evolve and become public enterprises on many occasions the founders end up becoming minority owners. Debt financing has con of depleting the liquid assets of the firm. There is less cash available for operating expenses when companies have to make debt payments. 8. The debt structure of a company depends of the corporate structure of the firm. Private companies cannot sell companies in the equity markets nor can they participate in the money markets. These companies are not able to finance their operations with common stocks or bonds. There are still plenty of alternatives for private companies. Equity can be sold directly to private investors. They can also use the banking industry to obtain loans. 9. I agree with you that the degree of aversion to risk affects the operating structure of a company. Many managers prefer equity financing because this method does not compromise the cash flow of an enterprise. When companies do not have a good rating by bond agencies such Moody’s they end up paying higher interest in the bonds they issue. The existence of tax shelters can motivate a company to choose debt financing over equity financing. If the government offers the ability to deduct interest from the tax returns the cash flow of a company improves. 10. I disagree with you to a certain extend because the stage of a company lifecycle influences the ability of a firm to have access to credit. Since start-up companies do not have earnings when they are starting out the banking industry views these firms as high risk propositions. They do not get loans from the banking industry. Established firms have multiple options for financing including banks, sale of common and preferred stocks, and issuing bonds.