The legal structure of a company, whether it’s an LLC or a sole proprietorship, helps to determine the type of funding that the owner receives. Different structures have different tax, income, and liability requirements for businesses owners and their partners. Anyone starting a business should choose the structure carefully and review their startup funding options.
Why Does Structure Matter?
The structure of a company affects the owner’s taxes, liabilities, and personal assets. For instance, a sole proprietorship provides no protection for the owner’s assets if a lawsuit were to occur. However, limited liability partnerships (LLPs) provide some liability protection. Overall, selecting the right type of structure is the first step, and the next is to decide which type of funding works best.
Private Limited Companies
Angel and venture investors lend the most to private limited companies. These companies are more likely to receive this type of funding than LLPs in which the professional liability of each partner is limited.
A private limited company structure provides the greatest chances of securing funding from angel or venture investors. A private limited company is not automatically guaranteed funding, and many businesses must pass major obstacles to find the right investment deal. And in some cases, a subsidiary of a foreign company is more guaranteed to receive angel funding than a private limited company.
Corporations raise capital mainly by reinvesting their profits, borrowing money, issuing bonds or financing through equity. Equity financing involves providing shares to investors who buy them and obtain a certain percentage of ownership.
Sole proprietors pursue a wide range of business financing options, from SBA lending to invoice factoring. Angel investors and venture capital firms are less willing to work with proprietors. This type of business owner needs to build a strong business plan and build a network of partnerships to support and vouch for the business.
Every business structure differs by its level of taxation, risk, and complexity. These are three major areas of concern that all startup entrepreneurs must know and research. It may be easier to obtain funding for one type of structure than another type. Before an entrepreneur thinks of financing, it’s important to select the right type of business from the start.