Starting a business includes much more than simply perfecting a business idea and placing it on the market. The type of business structure you choose can very well limit or improve your chances of developing a business idea to the next level.
Raising outside capital is one of the key ways of funding a business. However, not all business structures offer equal opportunities when it comes to raising money for your company. Here’s how different business structures affect a company’s ability to raise outside funds.
Raising funds as a business can be tricky. Having a solid idea and a business plan that inspires confidence is a must. That being said, there are several options on the table, depending on what type of business structure you’ve chosen for your enterprise.
One of the most common ways to raise outside funds is to borrow them at interest. However, different business structures are treated differently when it comes to borrowing funds. Sole proprietorship businesses are treated as individuals, meaning that your own credit score is taken into account.
Not only that, but you’ll most likely be asked to offer personal property as collateral. This level of personal liability is the reason why many have decided to go through the process of forming a limited liability company. Borrowing as an LLC brings a few issues of its own. Namely, it will be difficult to find lenders if your company was just formed. That being said, any future loan will be processed much faster with a higher chance of approval.
If you’re an LLC, you can choose to borrow money from individuals. Naturally, this type of loan requires an individual willing to invest in your business. One of the advantages of small business loans of this type is the lack of complicated paperwork.
The thing you need to keep in mind is the fact that different LLC have a different relationship with small business loans. This sort of borrowing is usually defined in the operating agreement every LLC has.
Raising outside funds through equity is a perfect example of why business structure matters. For one, you can only sell equity if the business structure you’ve chosen allows for more than one owner. In other words, a sole proprietorship is not eligible for this type of fund-raising.
On the other hand, if you decide to form a corporation, you can get equity investments by selling your company’s stocks on the open market.
Selecting the right business structure is a decision that depends on many factors. Available ways of raising funds from the outside are just one aspect of your business. You need to outline your business goals, any plans for future growth, and where you see your business being in 5 years.
Use that information to select the type of business structure that best fits your current and future needs. With that said, an LLC is currently one of the most popular options as it offers the best conditions for running a business in most states.