Final answer:
A complex capital structure in a business involves various forms of financing, such as bonds, preferred stock, and common stock. The choice between debt and equity impacts the company's cash flow, control, and accountability to investors like shareholders and venture capitalists.
Step-by-step explanation:
A business is deemed to have a complex capital structure when it has outstanding multiple types of financing instruments, such as a combination of bonds, preferred stock, and common stock. Such a structure becomes complex because it includes various forms of debt and equity, each carrying different rights, preferences, and levels of risk for the company and its investors.
When a firm decides to access financial capital, it weighs options like borrowing from banks, issuing bonds, or selling stock. Borrowing through loans or bonds requires commitment to scheduled interest payments, affecting cash flow. However, this allows the firm to maintain control over its operations without interference from shareholders. Selling stock equates to trading ownership for capital, introducing new stakeholders and governance structures such as a board of directors, which the management becomes accountable to.
Advantages and Challenges
Each financing option presents advantages and challenges. Loans and bonds allow a firm to retain more control but impose financial obligations. Equity financing dilutes ownership but doesn't require payments like interest or dividends unless chosen. Venture capitalists can offer capital while providing expertise and oversight, but they might demand a significant stake in the business.