Choosing the right business structure for attracting investors

| Feb 20, 2020 | Business Structure

Starting your business is going to be one of the hardest things you’ve ever done. Your business is a part of you, but you still want to keep your private accounts separate from your business debts and liabilities. As you start, your personal capital is likely not enough to fund the first years of your company. You need capital to achieve your dream, which means you’re going to need investors.

Meeting investor expectations

It is essential to imagine what your business might become as you choose its legal structure. You want that structure to protect you from liability and meet your financial needs while remaining favorable to investors. Here are three business structures that investors want to see in new ventures:

  1. Limited Liability Corporation (LLC): This structure is convenient for entrepreneurs who wish to offer ownership (by way of membership) while raising equity financing. You can include as many owners as you want with varying ownership classifications. This structure is less desirable to venture capitalists who may prefer to buy stock in a corporation.
  2. C Corporation: Venture capitalists favor a C Corporation because its structure allows for the distribution of stocks. The additional corporate taxes associated with this structure can become a burden later, but while your company is new, this is less of a concern (since you can expect little profit at the beginning).
  3. S Corporation: This structure offers liability protection but also caps the number of shareholders. Though there are some tax advantages to an S Corporation, it restricts financing options due to a limited class of stocks.

Planning for the future

The decisions you make at the founding of your start-up’s history will have significant repercussions on its growth later. You want your business open to investors with as few legal obstacles as possible. An attorney experienced in business law can help you turn your fledgling company into a business ready for fresh capital.