Profit Maximization and Legal Business Forms

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Table of Contents

Introduction
A profit maximization goal
Maximization of shareholders
The forms of the business
Theories of the term structure of interest rates
Advantages of obtaining funding via private placement
Conclusion
References

Introduction

Most of the firms and organizations mostly aim at making the highest profits possible from the operations of the firm. However, a company cannot succeed fully if this will be the only main goal for the company. Organizations should not only focus on maximizing their profits but they should also consider other important roles that they should carry along such as social responsibility, employee’s welfare, and other important things which are experienced in the line of business.

A profit maximization goal

Companies whose main aim is to maximize profits may experience difficulties in the long run due to failure to consider some vital factors and information in business operations.

Profit maximization in organizations only leads to maximization of the net income of the company but does not lead to wealth maximization of the company or the stockbrokers. This is because the aim of profit maximization fails to consider some factors in the business environment such as the risk involved in the number of the outstanding shares and does not reflect the timing of profits; that is when the profits maximization goal can be expected. (Arora, 2004).

A profit maximization goal in a firm does not put into consideration the risks of uncertainty that are involved in investments and lines of earnings. There are investment projects which are riskier than others and therefore if the way to get earnings is not considered then it may lead to big losses for the company in case the anticipated profits are not achieved.

Profit maximization goal does not take into account the dividends which are likely to be paid out to shareholders of the firm; this means that even if big profits are earned, payment of dividends to the shareholders may lead to a decrease in the profits and therefore the estimated profit levels will still not be achieved.

Maximization of shareholders

However, a firm can use the goal of maximizing the shareholder’s wealth to out way the disadvantages that come with the profit maximization goal. Use of maximization of shareholders wealth goal in a firm leads to maximization of the entire equity finance of the firm. This means that not only does it increase the net income like in the case of profit maximization but it also increases the wealth of the company. (Arora, 2004).

Maximization of shareholders’ wealth increases the long-term security by making viable investments and also meeting the share holders’ expectations. This improves the future productive capacity of the company and therefore making it more viable even in the future.

There are various forms of business: corporations, limited partnerships, general partnerships, and limited liability companies.

In organizational requirements and cost, corporations have corporation laws that need several formalities though they are the simplest and less expensive of the rest due to the set rules by the statute. Requirements include articles of incorporation filled when the company is formed. Ownership interest and management controls are separated.

In a general partnership, no filled form is required by the state. Partners enter into an agreement describing conditions of business association, uniform partnership act section 19 requires partners to keep books reflecting receipts as well as disbursements where any partner can access the books and ensure proper running of the business. A limited partnership requires filling a form executed by all the general partners to the state. The certificate can be amended on admission or withdrawal of a partner. Limited liability companies (LCC) fill articles of organization with the state which can be signed by any organizer but neo necessarily a member and should have a filing fee. The business structure of LCC usually dictates the cost and complexity of the agreement.

Owners of businesses expose themselves to many liabilities of businesses. However, the level of liability differs depending on the form of business in which a person is in.

The liabilities of corporation owners are limited to the extent of the stockbrokers’ investment. Corporations are separate entities from their members therefore the members are not liable for any debts of the business. In general partnership, however, partners have unlimited liability and they are liable for any torts or actions committed by other copartners. Limited partners are liable up to their contribution to the business therefore they are not liable personally for any debts of the company. In LCC however, members may be liable if they agree to be liable or guarantees a debt of the LCC, if a member commits a tort against a third party, or if the member has acquired unlawful distributions from the LCC. (Brown, 2005).

The forms of the business

The continuity of a business varies depending on the form of the business; a member of a business can cease being one through death, withdrawal, expulsion, disability, or bankruptcy. Corporations’ existence is not terminated by withdrawal or death of a partner unless if the certificate dictates so or as a result of stockbroker’s act or official decree; this is because the corporation has an independent existence from the members. General partnership dissolves on the occurrence of death or a partner’s withdrawal. The remaining partners can continue with the business but under the new partnership. The same case applies to the limited partnership; however, their remaining general partners can continue with the partnership since the death or withdrawal of a limited partner does not cause the dissolution of a limited partnership. LCC dissolves at asset date in the organization’s articles and members can vote for its dissolution or its continuity.

Corporate shares are the most transferable interests or ownership in businesses; it is only limited by incase of any applicable state or federal security laws. In a general partnership, a partner’s ability to transfer partnership interest is limited unless otherwise provided by partnership agreement; the partner is required to inform other partners. Partners in a limited partnership can only transfer their economic partnership but not their voting rights. On the other hand, LCC partners are only able to transfer their economic rights unless the LCC agreement provides for the admission of the transferee who has received the economic interest as a substitute or as a new member.

According to (Brown, 2005), Management and control of businesses depend on the form of business, corporations have separate management and ownership, and stockbrokers elect a board of directors who appoints officials for the corporation. Its affairs are managed by the board who can also delegate power to the committee to run the day-to-day activities; members can also limit the abilities of some partners. Limited partnerships are managed by one or more general partners and the limited partners do not involve in the management of the business. LCCs can either be managed by their members or by an appointed manager.

The ability to raise the capital of businesses depends on accessibility to the available funds. Corporations can gain their capital from debts (loans from stockbrokers or third parties) or from equity which involves the sale of corporate stock and can combine both equity and debt. General partnership gets capital from debt (loan from partners and third parties) and equity (contributions by partners). The ability to gain a loan depends on the creditworthiness of the partnership or its value. A limited partner capital is from the same sources but contributes to add to the general partner.LCC capital is from equity and debt and is attractive for investors because its structures are flexible and people participate in management. (Brown, 2005).

Tax considerations are important as owners of businesses want to know if they will be taxed and the amounts taxable since taxes reduce profits. Owners like one level of taxation structure for their businesses. LCC partners have one level of taxation to partners but are different for the entity.

Theories of the term structure of interest rates

According to (Howells, 2007), three main theories are used to explain the term structure of interest rates; expectancy theory (EH), liquidity premium theory (LP), and the market segmentation theory (MS). Of the three theories, liquidity theory is the most convincing of the three; this is because like the expectancy theory, liquidity theory says that long-term rates of interest will equal the average of expected future short-term rates.

However, LP modifies the LP theory by assuming that investors are risk-averse and will demand liquidity premium for the long-term bonds that they hold due to the risk of interest rates. The theory further assumes that the longer the maturity time for the bonds, the greater the premiums received. While (EH) does not explain why yield curves slope upwards, LP explains that even when the interest rates are expected to stay the same and be stable, the increasing liquidity premium explains why. (Howells, 2007).

Advantages of obtaining funding via private placement

There are various advantages that an organization derives by obtaining funding via private placement. One of them is that there are low and competitive fixed bank interest rates in contrast with the others which are fixed to floating prime interest rates, the interest rates of the private placement are determined by the combination of the terms and conditions of the loan, the credit of the obligor and the available treasuries available at the time of the contract.

Another advantage is that it has unique flexibility in the payment terms because it allows the debtor to customize repayment to suit their corporate needs which include the option of deferring payments even up to seven years and have schedules for payment whose amounts are determined by the debtor. (Milhaupi, 1998).

Funding offered by the private placement can be structured into a loan and repayments can be structured as repayment debt versus operating expense which is more advantageous. Another is that placement to one investor is confidential; there is no closing fee from the financing company and the lender does not rely on the transactions but on the promise to pay by investment or another similar way. (Milhaupi, 1998). A detailed review of finances, projections, business plans, and other documentation from a client is not necessary because of reliance on the promise made.

Conclusion

In conclusion, businesses should focus more broadly on other factors that ensure their survival and not just ways in which to maximize profits, one should also look into different forms of businesses, the advantages, and disadvantages in each, and choose the one that fits the available requirements. One should also adopt a good method of financing a business to ensure that the capital is adequate and the financial method is friendly.

References

Arora, J. S. (2004), introduction to optimum design, ISBN: 0120641550. Academic press.

Brown, R, L. & Gulterman, A.S. (2005). Emerging companies guide, United States. American Bar association.

Howells, P.G.A & Bain, K. (2007). Financial markets and institutions, United States. Prentice hall.

Milhaupi, J. C. (1998), the small firm financing problem, U.S. Heinonline.

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