Externally Business Structured

When thinking about this question, the first thing I had to determine is should I talk about Internal business structures or external business structures. Since both categories have five main types, I decided to talk about external business structures and in the next episode, cover internal business structures. Let’s start the show!

What is an external business structure you may ask? Well it’s how you form your business which in turn determines how you file your taxes. This is important because there are legal and tax implications to consider before choosing your structure. I’m not a lawyer, CPA, or financial advisor. I won’t tell you what type of business to form, but we will talk about each and some of the pros and cons to each one. The other reason your business structure is important, especially to an investor, is because it lets them know if your company is investment friendly or not.

Sole Proprietorship

Let’s start with sole proprietorships. Just like it sound, this is a one-person or sole-person business. Outside of friends and family, who should also stay clear of these types of structures, you’re not likely to get ANY investment dollars from an accredited investor or investment firm. It’s just too risky and there’s no legal structure setup. I could give you my investment, you could take it, spend it on booze (booze is such an old word) and I could do nothing about it.

Limited Liability Company (LLC)

Unlike Sole proprietorships, Limited Liability Companies or LLCs can be owned by one or more people. Most people I know start their business as an LLC. They do this because the owner or owners are protected from financial and tax liability. This means, the company maintains all liability, not the owners. Also, owners of an LLC do not pay themselves wages but share in the profit or losses based on their percentage of ownership.

For investment purposes, similar to sole proprietorships, many investors are not attracted to investing in LLCs. There’s still opportunity for investment of non-dilutive funds like government grants, accelerator/incubator funds, or pitch competitions.

Partnership

Similar to LLCs, investors are also weary of these types of structures. One of the terrifying parts for an investor is that you can add as many owners or partners as you want without regard of their interests.

S Corp

S Corps can be owned by one or more people. They can also be owned by another corporation. Income obtained by the owner(s) are filed through their personal tax return instead of being double taxed. That means being taxed as income for the owner and being taxed as revenue for the company.

There are some limitations to structuring your company as an S Corps:

• The company has to be a domestic corporation
• Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Can only issue common stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Why this is a less attractive option for investors is solely based on investor preference. The investor has to consider if they want common stock and if they’re willing to deal with some of the challenges of tax implications of being a shareholder.

C Corp

For investors who prefer more flexibility, they’re going to be looking at C Corps. They have a choice of receiving preferred or common stock. That’s also up to the owners to decide. C-Corps have the option of accepting any kind of investment from any kind of investor. The negative to the investor is that there’s double taxation for the company and the investor when they receive distributions.

I know that was a lot of information. Don’t worry if you’re a sole proprietor or LLC today, you can always restructure your company. This change may come with seeking investment or scaling your company. Work with your CPA, financial advisor and even lawyer to make the right decisions for you. That’s all for today, I’m your host Adrian T. Marable.

Until next time, and remember, “In business, organization is an absolute necessity, not an alternative.” – William Feather