financial management

While limited liability makes the corporate form attractive to equity investors, lenders some- times view the limited liability feature as a disadvantage. If the borrower experiences fi nancial dis- tress and is unable to repay its debt, limited liability blocks lenders’ access to the owners’ personal assets. For this reason, chartered banks oft en circumvent limited liability by requiring that owners of small businesses provide personal guarantees for company debt.

Th e relative ease of transferring ownership, the limited liability for business debts, and the unlimited life of the business are the reasons why the corporate form is superior when it comes to raising cash. If a corporation needs new equity, for example, it can sell new shares of stock and attract new investors. Th e number of owners can be huge; larger corporations have many thou- sands or even millions of shareholders.

Th e corporate form has a signifi cant disadvantage. Because a corporation is a legal entity, it must pay taxes. Moreover, money paid out to shareholders in dividends is taxed again as income to those shareholders. Th is is double taxation, meaning that corporate profi ts are taxed twice—at the corporate level when they are earned, and again at the personal level when they are paid out.3

As the discussion in this section illustrates, the need of large businesses for outside investors and creditors is such that the corporate form generally is best for such fi rms. We focus on corpora- tions in the chapters ahead because of the importance of the corporate form in the Canadian and world economies. Also, a few important fi nancial management issues, such as dividend policy, are unique to corporations. However, businesses of all types and sizes need fi nancial management, so the majority of the subjects we discuss bear on all forms of business.

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