Corporate financial planning

Our personal financial planning is just as important as our business financial planning. As much as entrepreneurship is encouraged in our country, some of us do not take enough time to build a strong foundation necessary for a successful business. Building a foundation of understanding and good financial habits play a key role in the success of our business ventures. The vast amount of knowledge we learn about ourselves can be transformed into powerful moves that can accelerate the way we do business. After all, we are the ones that operate our businesses. Let us not forget to take responsibility and accountability for our actions both personally and business-wise. The terms responsibility and accountability are often also not fully understood. Responsibility is taking ownership of our own actions and accountability is taking ownership of the actions of the whole team we lead. Accountability basically involves indirectly taking responsibility for the actions of individuals that form part of our team. Which is why it is required of leaders that are known to the public but lead a team of individuals unknown to the public. Both aspects of responsibility and accountability form a branch in the concept of ethical values. Managing ourselves is the first step and managing our businesses and resources is the second.    

Our financial planning topic for this week is CORPORATE FINANCIAL PLANNING. A business entity can be a juristic or legal person under the eyes of the law. This means that it can have its own legal identity consisting of its own assets and liabilities as well as its own income and expenses to declare for taxation purposes. Corporate financial planning involves similar aspects as that of personal financial planning. It includes ethical practices of financial and resource management, risk management, succession planning, retirement planning, investment planning, taxation and insurance. The difference between corporate financial planning and personal financial planning lies in the different perspectives and approaches in which these different aspects are considered to achieve set goals. 

Business identity

It is very important before starting a business to know the different business identities, known as business entities, our business can be based. Different business entities have different rights under the court of law. This is in relation to our personal liability and connection to our business. Be mindful that not all business entities have the privilege of being recognised as juristic or legal person under the court of law. This is a very important aspect to consider, as this privilege can affect our personal financial status and visa versa.

The different business entities we can venture into include: Sole proprietorship, Partnership, Close corporation, Company and Business trust.

Sole proprietorship

Sole proprietorship is often known as the simplest way to do business. There are no formalities required to start a business as a sole proprietor. This business identity involves a natural person (which is us) running a business in their own name. There is no separation or legal person identity between us and our business. This means that we are our business and our business is us. Therefore, our business activities with regards to taxation, will form part of our individual tax declarations. This can be the case when declaring a combined calculation of our personal and business income and disposal of assets for capital gains tax.

Advantages of being a sole proprietor

·      No formalities to start or discontinue the business

·      Only a trading permit or license is required – such as running a combi

·      One person can be involved

·      Personal life insurance can be used to cover the risk of any debts and liabilities in the event of death.

Disadvantages of being a sole proprietor

·      Personal assets are at risk if the business fails – very important when considering marital property rights and retirement benefits.

·      No business succession planning as all trading permits and licenses become ineffective in the event of death – however, the business assets can be inherited by other parties if the proper arrangements are made.

·      There is no employer-employee relationship therefore, no proof of employment other than self-employed – this can be a challenge to prove in our CVs upon trying to enter into the job market at a later stage.

Partnership

A partnership is a joint business venture between two or more individuals. These individuals are known as partners in the business. A partnership involves a legal agreement between partners to avoid possible problems in the future. The legal agreement or contractual relationship does not need be registered but, it does need to follow the requirements of a legal contract. The contract can be in a written format, stating the purpose of the partnership to make a commercial profit, stating each partner’s contribution to the partnership, stating the rights of each partner and stating the profit sharing-ratio.

Advantages of being in a partnership

·      Combined resources and effort

·      Unlimited number of partners

·      Few formalities – such as the contractual agreement

·      On-going business venture that is not limited to one project

·      Immovable properties such as buildings can be registered in the name of the partnership

·      All assets of the partnership have shared ownership between partners according to the profit-sharing ratios

Disadvantages of being in a partnership

·      Full personal liability and exposure to risk should the business venture fail – no juristic or legal person identity

In other words, all liabilities of the partnership have shared accountability between partners according to the profit-sharing ratios

·      No business succession planning – the partnership agreement becomes invalid or ineffective in the event of death of a partner or addition of a new partner

Close corporation

A close corporation is a regulated business entity with juristic person privilege. It involves an ownership stake between one up to 10 individuals in most countries. Also, be aware that some countries no longer allow the registration of new close corporations. However, they still allow for the change in ownership and change in member details of existing close corporations.

Advantages of being a close corporation

·      Security – juristic person identity implies separation between the assets and liabilities of the close corporation and that of its members

·      Regulated yet less complex than a company

·      Business succession planning – the business can continue in the event of death of a member

Disadvantages of being a sole proprietor

·      Has some legal formalities – that can involve a member agreement that covers extensive issues

·      New members have an automatic entrance into the business agreement though they were not involved in its drafting

Company

A company is regulated juristic person with an Act of governance in our legislation. It can be classified into a Private Company (Pty Ltd), Public Company (Ltd), State-owned (SOC) or Parastatal and Personal Liability Company (Inc). Individuals part of a company are known as shareholders. A private company is a business entity that is for profit and involves between one and 20 individuals in most countries. A public company is a business entity that is for profit and involves an unlimited number of shareholders that have different voting rights. A state-owned company or a parastatal institution is a business entity that is fully-, majority- or partly-owned by a national government structure. A limited liability company is a business entity that is a private company consisting of professionals with both private and public interests such as stockbrokers and attorneys.

Advantages of being part of company

·      Security – has juristic person identity

·      Can have employer-employee relationships

·      Business succession planning

·      Regulated and verifiable

Disadvantages of being part of a company

·      Has many formalities – such as registration, Memorandum of Incorporation and auditing

·      The Companies Act can be restrictive to the business

Business trust

A business trust is a business entity that is a trust. In personal financial planning, a trust is usually used for estate planning to continue to manage our assets for the benefit our beneficiaries in the event of our death. However, in corporate financial planning, a business trust is used to further empower our beneficiaries by a way of operating as a business that trades.

Advantages of being part of a business trust

·      Security – own legal identity known as legal person

·      Regulated and verifiable

·      Business succession planning

·      Beneficiaries can trade their interest portion out to others not initially in the trust

·      Can have unlimited number of beneficiaries or participants

Disadvantages of being part of a business trust

·      Has many formalities

·      Can be expensive to operate

It is empowering to know the different choices we have with regards to choosing the identity of our business upon its formation. We may consider how many other people we want to involve now and in the future of our business, whether security of our personal assets may be of importance to us, the amount of formalities involved in the formation and running of our business, or the possibility of succession planning to pass on our business to our children as a legacy. Be aware that these different business entities can be considered to manage our other resources identified in our personal financial planning. Once again, the vast amount of knowledge we learn about ourselves can be transformed into powerful moves that can accelerate the way we do business.