For any business to succeed, cash must be readily available. After all, if you have cash flow problems, you may not be able to pay vendor or employees. You probably also can’t invest in research and development. Did you know, however, that your corporate structure affects your financing options?
Limited Liability Companies
Many entrepreneurs fall in love with LLCs. This makes sense, as an LLC gives you the tax benefits of a partnership with the structure of a corporation. Because LLCs allow for pass-through taxation, you don’t have to worry about paying income tax on behalf of the company. Instead, you may add the income to your individual tax return. Of course, this limits the funding you can receive as the head of an LLC. Specifically, you probably cannot compete for venture capital, as venture capitalists must pay tax on your income. As you may suspect, not many business-minded investors are apt to go for that.
If you have a small business and opt not to form an LLC, a sole proprietorship may be a simple way to avoid a complicated corporate structure. While you avoid tax headaches with a sole proprietorship, you also limit the funding you may receive. Because sole proprietorships are inextricably intertwined with their owners, bankers are likely to use your personal credit history when making lending decisions. If you don’t have perfect credit, you may not have access to the cash you need to due business.
Corporations have significant tax obligations, but they also have arguably the best means for improving cash flow. If you decide to form a corporation, you separate your personal financial situation from that of the business. As such, you may be able to open corporate credit cards, seek angel investors and apply for traditional bank loans without worrying about your personal credit history.
Finally, partnerships over overcome many of the hurdles that other types of business organizations face. Because partnerships have shared interests, partners share profits and losses. This can make competing for a business loan easier, as you don’t have to rely solely on your personal creditworthiness.
Many factors affect your choice of corporate structure. While you may be consumed by tax and liability implications, you can’t afford to ignore financing. When choosing the right structure for your business organization, be sure you pick the one that puts you in the best position to succeed.