When a business begins operations, the owners of the business make financial commitments to each other and to the business.
A financial commitment occurs when a person or entity assumes the responsibility to cover certain expenses. Some financial commitments have an expiration date, while others are ongoing, with no specific end date. Financial commitments are liabilities for the party that agrees to bear the cost. Parties who breach such agreements often have to take legal action or other types of legal action.
When a business begins operations, the owners of the business make financial commitments to each other and to the business. Some owners may agree to invest a certain amount of money in the business for a certain period of time. Other business owners invest minimal money but take responsibility for some of the business’s debts in the event the business becomes insolvent. In many cases, business owners seek financing from lenders, and these lenders make a financial commitment to the business when loan applications are approved. Once the loan is closed, the entrepreneurs assume the financial commitment to pay off the debt.
Government entities use taxpayer funds to pay for educational programs, the military, and other types of public services. The initial cost of such programs often exceeds short-term tax revenues, which means that government entities must borrow to cover short-term public expenditures. In many countries, government entities borrow in the form of general bonds. These bonds are guaranteed against future tax receipts. This means that the government and the taxpayers share the responsibility to pay the debt, so both parties make a financial commitment to the bondholders.
In addition to businesses and organizations, consumers often make financial commitments voluntarily or involuntarily. In many nations, there are laws that make parents responsible for covering the basic living expenses of their children. Separated parents may have to make child support payments and people who refuse may have their bank accounts or paychecks garnished. In some places, children can be emancipated from their parents, which means that they no longer have to live with them, but also that the parents no longer have financial obligations to their children.
The laws of many nations mean that spouses have financial obligations to each other. This can result in the need for financial arrangements when couples divorce. In some countries, financial obligations extend not only to spouses, but also to partners in legally recognized civil unions. The primary breadwinner in a marriage or civil union may have to make alimony payments to another partner or spouse after the legal separation takes effect.