JOAN GOES NATIONAL AND BEYOND Joan comes to you five years later after choosing
ID: 2746992 • Letter: J
Question
JOAN GOES NATIONAL AND BEYOND
Joan comes to you five years later after choosing to start her own business. It has been successful and she now wants to go national. However, she needs capital. She has two people who are willing to invest in her corporation if she chooses to go that route. She can get bank loans to grow the business, but is worried about the personal liability she might incur. What would you advise her to do? If you tell her to incorporate, how would you suggest that she structure the financing of the corporation? Explain.
CORPORATE DIRECTORS
Ever since the Ford Pinto case, Enron and now Murdoch there is an increasing number of laws passed that make corporations criminally responsible for their actions. The Supreme Court recently decided that because corporations are considered "a person" in the law they cannot be limited in their campaign contributions. In light of this recent decision, should corporations, and the corporate directors, be responsible for their criminal actions? Are corporations persons? Can you hold the corporate person responsible as well as the directors? If yes how?
Explanation / Answer
The question relates to Joan the jewelery designer who has created a new and unique jewelery called the neacklet.
I order to scale up her business and go national Joan needs capital. Her options are funding from two people who are willing to invest in the corporation or to avail loan from banks.
In case of the first option, where thw two investors are willing to invest in her venture, there is an advantage that the risk of loss will not be entirely hers. Usually, the investors also acts like mentors and helps and advices in the scaling up process.
The second option of taking loan from bank will pose a higher risk as some of the assets will have to be leveraged. It will have to be leveraged as a collateral to secure the loan. Besides, interest expenses will have to be borne by the enterprise.
So, my advice would be to let the two people invest in her corporation. This will reduce Joan's risk exposure. Besides, the two investors may guide the future strategy of the firm in a more prudent manner as they as investors will have the best interest of the firm in mind.
The financing of the corporation, if incorporated, will be shown as an equity investment. The two investors will hold equity in the firm that will be in proportion to the fund amount that they put in the firm. Thus the equity of the firm will be held between Joan and the two investors.
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