| The most common business structures are | | | | costs, but makes no claim beyond the amount of the |
| proprietorships, partnerships, and corporations. A | | | | debt no matter how great our success. Standards |
| proprietorship is simply a one-owner business. It is the | | | | for debt financing are generally very difficult for |
| most prevalent form (on the order of 70% of all | | | | startups to meet; lenders are not generally willing to |
| businesses) because it is the simplest and least | | | | share the risk with you. If a lender turns you down, |
| expensive to start. | | | | ask them for specific reasons. If the reasons cannot |
| A partnership is basically a proprietorship for multiple | | | | be countered with this lender, the insight gained can |
| owners. Most are general partnerships, where each | | | | be used to strengthen the presentation to the next. |
| partner is held liable for the acts of the other | | | | The advantage of selling shares of ownership to raise |
| partners. A limited partnership allows for general and | | | | capital, referred to as equity financing, is that the |
| limited partners; limited partners' liability is limited to | | | | investor is sharing the risks of the venture; this |
| their contributed capital. | | | | lowers expenses since there is no debt service to be |
| If you choose to go into business with a partner, be | | | | paid. The investor also shares the rewards, however, |
| sure to prepare a formal, written partnership | | | | and the entrepreneur must be careful not to sell the |
| agreement. This should address the contribution each | | | | equity too cheaply. |
| will make to the partnership, financial and personal; | | | | What do we have to offer prospective investors? |
| how business profits and losses will be apportioned; | | | | For most, their primary interest is in a high return on |
| the salaries, and financial rights of each partner, and; | | | | their investment, through dividends and appreciation. |
| provisions for changes in ownership, such as a sale, | | | | There is little appeal to most investors in being a |
| succession, or desire to bring in a new partner. | | | | long-term minority owner in a closely-held business, |
| The corporation is a legal entity, separate from its | | | | so some way of "cashing out," must be offered, |
| owners. It is a more secure and better-defined form | | | | such as a provision for company buy-back or a public |
| for prospective lenders/investors. Incorporation is | | | | offering. |
| perceived as limiting the owner's liability, but personal | | | | Venture capitalists look for generally larger deals and |
| guarantees are generally required whenever there is | | | | impressive returns. Many fund projects only in specific |
| liability exposure. | | | | industries; some work only from referrals from within |
| The traditional form is called the C-Corporation. An | | | | their "network." Carol Steinberg, in "Success Selling," |
| S-Corporation is frequently preferable as a start-up | | | | puts the odds of receiving venture capital funding in |
| form, since the losses expected in the early stages | | | | perspective: "Each year a venture capitalist fields 400 |
| of the business may be applied to the owner's | | | | to 500 deals, seriously reviews 40 or 50, and funds |
| personal tax return. Other forms include the LLC, or | | | | only 4 or 5." |
| Limited Liability Corporation; Trusts, often for a | | | | Less visible as a source of startup capital are |
| specific time frame or purpose, and; combinations of | | | | individual investors, known as "angels," who typically |
| legal entities such as "CoOps" and joint ventures. | | | | invest $50,000 to $250,000 in private companies. |
| Enlist the legal and tax advice of the professionals as | | | | While we must generally "recruit" such investors |
| to which form suits your venture best. | | | | ourselves, angels are thought to represent a |
| Ownership Structure and Capitalization | | | | significant pool of risk capital. |
| Once the legal structure is decided upon, issues of | | | | While stakeholders are hard to find at startup, |
| distribution of ownership, and distribution of risks and | | | | sources of assistance are available. A good starting |
| benefits may be addressed. The primary decision to | | | | point is the U.S. Small Business Administration (SBA). |
| be made is whether the entrepreneur will finance the | | | | Their Small Business Investment Company (SBIC) |
| venture or whether there is a need for other | | | | program allows private investment partnerships, or |
| stakeholders, and whether these stakeholders will be | | | | SBICs, to leverage their own capital using SBA |
| investors or lenders or some combination thereof. | | | | guarantees. |
| Financing our venture by borrowing adds to our fixed | | | | |