Financial Management for Technology Start-ups by Alnoor Bhimani

Author:Alnoor Bhimani
Language: eng
Format: epub
Publisher: Kogan Page Limited
Published: 2017-07-19T16:22:28+00:00

Top managers often serve on the board along with outside directors who are not part of the company’s management. They might make planning decisions and develop business goals and policies.

There are two types of companies: private and public. Public companies have the right to offer their shares for sale to the general public. There’s no limit to the number of shareholders they can have. If a public company meets the requirements of a particular stock exchange, its shares can be traded on that stock market. On the other hand, private companies are owned by relatively few shareholders. There’s an upper limit to how many shareholders they can have. Private companies are less regulated than public ones, but there are still a few requirements they have to meet.

A company’s total capital is divided into shares. A share just represents a unit of the shareholders’ interest in the business. It’s important to keep in mind that the face value of each share, and their trading value, are different. The face (or nominal) value is the value of a share when it is first issued. The trading value is the current purchase or selling price, according to the market; the market value isn’t fixed like the nominal value.

There are lots of advantages to forming or ‘incorporating’ your company. One of the biggest is that, unlike individual proprietorships and partnerships, a company has limited liability. As we saw above, shareholders aren’t personally liable for the corporation’s debts. If a corporation defaults, or goes bankrupt, the most shareholders can lose is their initial investment. On top of that, shareholders can receive dividends on a regular basis. The level of dividends will be decided by the board of directors. When a company earns profit, it can either reinvest it in the business, or pay it to shareholders as a dividend. A ‘formed’ company like this can raise funds by issuing shares to investors, and this is something that is particularly useful for start-ups.

But, companies can suffer some drawbacks. Double taxation is one of these. Companies pay taxes on their profit, and separately from that, shareholders have to pay tax on any portion of the profits they get. Despite this, tax rates set by the government and tax shields on income can make it quite worthwhile to form (or incorporate) your company. There are usually low tax rates initially applicable for start-ups as well as many tax deduction incentives, because governments want to encourage small businesses and entrepreneurs. But there will be costs you’ll come up against including legal costs and registration fees. It’s also worth bearing in mind that incorporated companies face higher levels of regulation, compliance and accounting requirements than do partnerships and individual proprietorships. Auditing requirements could prove expensive to meet.

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