Does Your Corporate Structure Affect Business Financing?
Part of the process of creating a legal business entity is choosing your corporate structure, which is how you legally define it to the IRS and to other government organizations. Sometimes, the type of company you run will help to determine which structure you need to use, but in many cases, you can choose your own. For this reason, it’s important to understand how the structure might affect your business financing options.
Corporations often have one of the best shots at getting a range of financing options because it creates a separate business entity that includes you (the founder) as well as a management team. Corporations can get corporate credit cards, which have higher limits than small business credit cards, as well as often receive larger loans overall. Corporations are also eligible for other types of financing that other companies aren’t, such as angel investors. Angel investors provide the money needed for corporate businesses to grow and often does not require any type of repayment plan. Instead, these investors receive a portion of the profits if your business takes off.
If you want to create a business quickly so that you can get your product or services out into the world, the sole proprietorship is the fastest option. However, a sole proprietorship means that you and your business are one and the same, meaning your personal finances are factored into anything legal, anything tax-related and, often, anything having to do with financing. Without good personal credit, you’re less likely to receive lines of credit when operating as a sole proprietor. You may also need to provide personal items, such as a house or car, as collateral.
Limited Liabilities and Partnerships
Although sole proprietorships and corporations are the most options for a corporate structure, they aren’t the only ones. Many people also file as a limited liability company or a partnership. Limited liabilities combine partnerships and corporations and allow you to act alone or partner with other owners. Anyone who is part of an LLC has personal liability protection so that their own assets aren’t used for legal or debt purposes. While many financing options are available, LLCs may not qualify for venture capital options. Financing for partnerships is more flexible and for sole proprietorships but not as vast as for corporations. Partnerships may qualify for loans with a business credit profile, but keep in mind that one partner with low credit may bring down the other partners’ credibility when applying for financing.
Before deciding on a corporate structure, it is important to consider how much financing you’ll need, whether the type of business you own is required to register as a specific entity and whether you want to have business partners. An informed decision is essential for running a successful company.