Question

If a corporation has a choice between raising funds for expansion through stock sales or bond sales and wants to keep its liabilities to a minimum, it should

Answer 1

Corporations can raise money through issuance of corporate bonds or sell shares of stock without taking its company to public. Issuing bonds or stock shares affect a corporation in different ways. With a bond issue, it has the benefit of reducing your tax liability without sacrificing control of your corporation.

Bondholders are your corporation’s creditors but not the owners whereas in case of stock share, by comparison, represents a potential ownership claim in your corporation. Every stock share you sell further dilutes your ownership percentage which might play a vital role in outvote you on corporate matters. This is one compelling reason why corporate owners issue bonds instead of selling stock.

In a bond debt the principal amount is a loan and does not increase your taxable income. You can deduct the interest payments make to bondholders on your corporate income tax return. This in turn reduces your taxable income and your tax liability. When you sell stock, though, the proceeds are taxed as income. Your corporation is further taxed on the dividends you pay to your stockholders. This increases your taxable income and your tax liability.