Debt–Equity Structure

Capitalizing a business enterprise takes on many permutations of the basic structure whereby the enterprise has some quantity of debt and some of equity. The standard components of debt / equity structure are:

  • • Short Term Debt
  • • Long Term Debt
  • • Hybrid Obligations (having elements of both debt and equity)
  • • Preferred Equity
  • • Paid In (Discretionary) Capital
  • • Permanent Capital
  • • Accumulated Earnings

While all equity is provided (suffered) by owners of the enterprise, debt capital may be wholly, partially, or not at all provided to the business by its owners. Further, each component of debt capital provided by the owner(s) can be made by direct loan, by guarantee of third party debt, or by colaterizing the assets fo owners in support of third party debt.

The amount of debt compared to total equity, the debt to equity ratio, in turn derives from a number of factors:

  • • The Nature of the Business (Industry)
  • • The Entity Form of the Business
  • • Owner Policies Concerning Capital Structures (Including Risk Tolerance)
  • • Creditworthiness of Both the Enterprise and Its Owners
  • • Market Factors (Interest Rates, Credit Availability, Economic Conditions)
  • • Present and Future Expected Cash Flows and Enterprise Profitability
  • • Tax Considerations
Tax Considerations go principally to the issues of deductibility of return payout to the enterprise, and of taxation of the return to the owner-investor. Planning centers around an examination of these factors as influenced by basic tax rates, income tax treaty alternative rates, non treaty based double tax mitigation provisions in the enterprise’ and investor’ countries, and thin capital rules of the enterprise country.

NEOITG’s long experience with these issues will help you unlock the knowledge barriers between you and an optimal capital structure both initially and on an ongoing basis.