Corporate Income Taxes - Client Letter Research Paper

Corporate Income Taxes - Client Letter - Research Paper Example Equity financing on the other is when a company issues shares of the company’s stock and receives money in return. Depending on the capital raised through equity, the company may relinquish about 25% to 75% of the business. The advantage of using debt to finance capital expenditure is that you will not give up control of your business. The lender who is usually a bank or lending institutions does not have any right to manage or oversee how things are run in the business. By simple means, your only obligation will be to repay the loan in regard to the agreed terms. Additionally, interest paid on the loan is tax deductible thus it could be savings in term of tax when the business is still small (Hovakimian, Opler, & Titman, 2001). There is some predictability with debt as the corporation knows exactly how much it owes. The disadvantage for this form of capital formation is that the money has to be paid within a fixed period regardless of the business success. Relying too much on debt may prove to be strenuous if the business cash flows do not balance. Potential investors may also run away as a huge debt is termed as a high risk. Loans are not just expensive, the lender might also ask for collateral which includes the business assets or personal guarantee which will put you on the hook in case the payment defaults. Equity financing on the other hand does not have to be repaid. The risks and liabilities of the company are shared between the ownership and the investors that come on board. Since no debt is being repaid, cash flows generated can be used to reinvest back into the company and promote further growth or may be to diversify to other areas of interest. Having a low debt equity ration is advantageous as it puts the company on a better position to acquire loans in future (Klein, O’Brien, & Peters, 2002). Equity investment may sound good but it also means that the corporation has to give up