As Mr. Patrick Brennan is a very young business person and having better aspirations, it is not better for him to retain his establishment under the Proprietorship structure. Considering the growth shown in his business graph, I advice Mr. Brennan to get your organization incorporated as soon as possible.
I hereby point out three general advantages that the corporate structure has over the proprietorship structure. (a) First of all, when a firm is incorporated it becomes a distinct legal entity. Its life commences from the date of incorporation. It enjoys all the legal privileges laid down by the respective countries.
(b) Secondly, it acquires a perpetual succession. The members may come and go, but it goes on for ever, unless it is wound up. (c) Its property is not the property of the shareholders. The shareholders have a right to share in the profits of the company when realized and divided. Likewise, any liability of the company is not the liability of the individual shareholders. (2) A characteristic feature of corporate enterprise is the separation between ownership and management as a corollary of which the latter enjoys substantial autonomy in regard to the affairs of the firm.
In the corporate structure shareholders are the owners of the enterprise and the management is the agent of the owners. The shareholders delegate the decision making authority to professional management on the premise that the latter will work in the interest of the former. In order to ensure that management would take optimal decisions compatible with the shareholders’ interests of value maximization, of course, they have to be paid incentives. Certainly, there may also arise agency problems in terms of conflicts of interests. Policies to mitigate the agency problems do, of course, involve cost.
However, this is the price that the owners have to pay to harmonize the conflicting goals between them and the management of the enterprise. But, there is no need of worry Mr. Brennan because in order to minimize the agency problems and agency cost, you can arrange certain provision for appropriate incentives and for monitoring of agents. By auditing the financial statements and limiting decision making by the management you can easily monitor the agents and thereby reduce the agency costs. Part –B (1) COMPUTATION OF WEIGHTED AVERAGE COST OF CAPITAL