Strengths and Weaknesses of Corporate Forms

Study Notes

Benefits of Corporate Form:
- Limited liability protects owners from personal debts.
- Ownership transfer is straightforward, enhancing liquidity.
- Corporations have an unlimited lifespan unless restructured or liquidated.
Drawbacks of Corporate Form:
- No confidentiality; financial information is publicly accessible.
- Potential delays in decision-making processes due to corporate governance.
- Subject to extensive regulatory scrutiny.
- Double taxation applies to corporate profits distributed as dividends.

Corporations pay corporate tax (e.g., 25% on $1,000 profit = $250).
Dividends distributed to shareholders incur additional taxation (e.g., 20% on $750 = $150).
Total tax burden for shareholders sums to $400 or 40% of the original income.

Financial management varies with firm size; small firms often involve the president in finance.
As firms grow, finance typically transitions to a dedicated department linked to the firm’s leadership.

Finance is an extension of economics, often referred to as financial economics.
Finance managers utilize marginal cost-benefit analysis for financial decisions, emphasizing the balance between benefits and costs.

Financial and accounting functions are interconnected, especially in smaller companies where one individual may handle both roles.
Accountants focus on accrual accounting methods while finance emphasizes cash flow analysis.
Example: Under accrual accounting, sales reported at RM100,000 despite collection status; cash method shows RM0 sales.

Objective: Maximize shareholder wealth as a primary long-term goal.
Short-term share price fluctuations may mislead managers to prioritize immediate profits over sustainable growth.

Stakeholders include owners, employees, customers, suppliers, creditors, governments, and communities.
The "Stakeholder View" promotes minimizing harm to all stakeholders, advocating for corporate social responsibility.

Ordinary Shareholders: Aim to maximize wealth from share ownership.
Employees: Seek fair compensation, job security, and better working conditions.
Trade Creditors: Require timely payments to maintain business relationships.
Long-term Creditors: Expect timely interest and principal repayments on loans.
Customers: Desire quality products with reliable delivery and service.
Government: Seeks tax compliance and contributions to economic policies.
Local Community: Concerns with environmental practices and community involvement.

Arises from the separation of ownership and control, where managers' interests may diverge from those of shareholders.
Consequences include managers prioritizing personal objectives over shareholder wealth maximization.

Corporate governance promotes fairness, accountability, and transparency, addressing agency challenges.
Market mechanisms, such as hostile takeovers, may incentivize managerial alignment with shareholder interests.

Aim to maximize firm value and shareholder wealth through strategic investment, financing, and dividend decisions.
Investments should yield returns above the minimum acceptable hurdle rate. If not, surplus cash should be returned to shareholders.