In our second of five articles highlighting a total of ten good reasons to set up a business entity, we talk about raising 
cash and a company’s perpetual life.
Many small business owners struggle with cash flow. They often either don’t have good credit, are too small for traditional banks to want to lend them money, or SBA Loans are too big for what they want to borrow. What’s a girl to do? One of the reasons business owners choose a business entity is for the:
- Ease of Raising Capital. If you have either friends, acquaintances, or family members who want to participate in your business venture, but don’t want to be tied down with day-to-day operations, you can raise capital by making these people partial owners of the business. If you are an LLC, you can sell them membership certificates for a fractional ownership of the company, or stock certificates if you are a corporation, and partnership shares if you are a partnership. These people would usually be a minority owner in the entity, and would not necessarily have a say in the direction of the company or management decisions. If your business goes belly up, typically the most these investors lose is their initial investment. You may wish to choose people who have extra cash, and not ones who are investing their life savings, especially if yours is a high-risk business, or one where there is a lot of competition or high failure rate. You will want to be sure the business has either written bylaws (for corporations), an operating agreement (for LLCs ) or a written partnership agreement (for limited partnerships) that at a minimum spells out how (or if) shareholders participate in the business, who the managers of the business are, and the respective ownership percentage for each shareholder.
- Perpetual Life. As a sole proprietor or a partner in a general partnership, if you die or become disabled, often the business dies or becomes disabled with you not there to run the business. With a business entity, like a corporation, if you have other shareholders, the company continues to operate in many cases. This is especially true if you have planned at the outset for management succession in the form of a written document, and know that if partners either die, retire, become disinterested or disagree on the direction of the company, you have a blueprint to keep the company going by one person buying out another.
Our next article discusses two more good reasons to set up a business entity. Stay tuned.
Thinking of setting up a business entity? Call Nancy at 415-399-0993 to determine which business type is right for you. There is no charge for the consultation. Mention this article and get a free copy of Nancy’s “10 Commandments for Small Business Success.”