Exam 25: The Nature of a Corporation and Its Formation

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Three ways of raising $25 000 would include: (1)selling additional shares in the corporation,(2)borrowing money from the shareholders (by way of shareholders' loans),and (3)borrowing money from external sources by issuing bonds or promissory notes.(1)Equity is beneficial from the company's standpoint because it is carried as an asset and not as a liability.The person supplying the equity,however,is not entitled to the return of his or her money because he or she becomes a shareholder and not a creditor.(2)Shareholders' loans,if the corporation is dissolved,are repaid prior to the distribution of funds to shareholders.If only one shareholder is going to inject the $25 000,she or he may be glad to have that priority.(3)Debt instruments such as bonds or promissory notes are carried by the corporation as a liability on its books.The interest on these instruments would be a legal obligation.If the corporation has pledged any assets in support of the debt,upon dissolution,they would be available to the secured creditors,giving them priority over unsecured creditors and shareholders.A combination of the above three ways of raising money might be appropriate.