Shareholder Info: Donna Formed a Corporation Several

Shareholder

Info: Donna formed a corporation several years ago by issuing 500 shares of stock. There are 10 shareholders with the smallest shareholder owning 25 shares and Donna holding the most at 100 shares. The corporation needs additional cash, but the current shareholders do not wish to have any additional shareholders. What are their options and what additional factors should the current shareholders consider in raising the additional cash? What can Donna do to add additional shareholders, if anything?

There are various ways for Donna's corporation to raise additional capital. One is through debt financing while the other one is through equity financing. Debt financing involves bonds, bills, loans, and notes while equity financing involves selling company stock to other investors. Each approach has its own advantages and disadvantages.

Debt financing aims to raise additional cash by borrowing money, usually with interest. The advantage is that business ownership is not affected, and company's only obligation is in repaying the loan. The disadvantage is incurring debts affects a company's financial position and puts its credit rating at risk. Incurring too much debt can also hamper a company's potential to attract future investors and customers.

Equity financing, on the other hand, aims to raise additional capital by trading cash with business ownership. The advantage is that the company avoids incurring debt. The disadvantage, however, involves potential loss of control due to the distribution of the company's ownership among additional investors.

Donna's corporation has 500 shares of stock, with Donna having 100 shares. We can understand why the remaining shareholders are hesitant to add more investors through equity financing because it would involve further distribution of ownership and control. They have to consider how much cash they really need to raise, and how much ownership and control they are willing to give up. They can maintain control by selling only the minimum number of shares that would cover their needed capital but would retain majority control over the company. Donna can let other investors know of this approach if she wants to add additional shareholders. They should also consider whether their individual investments in the company are short-term or long-term. If long-term, they should protect their ownership as long as possible. Debt financing can also be considered if the additional capital can be repaid within the short-term, and there will be no need to trade business ownership at all.