What business forms should businesses consider when seeking investors?
One important aspect of deciding what form a business should take is the type of investors it has or is seeking. Below are some questions to consider when deciding how the makeup of your investors will influence what kind of business will be formed.
Will the business be heavily dependent on investors for its capital?
Some businesses rely on sales to build their capital, while others must rely on investors to raise the amount of money they need to get started or to expand. One business that might depend on investment is a company that produces software; while it may have an excellent idea, the company cannot pay its staff of developers or market its product until it has something to sell. If a business will need a large amount of invested money, its organizers should select an entity that will be attractive to the type of investors that best fit its needs.
What type of investors is the company seeking?
When deciding what business form to choose, a business should consider its financial needs. Investors may come in the form of friends and family, individuals involved in the business, partner companies, venture capitalists and others.
Each type of investor has different needs. A partner company that is financing a venture that will be crucial to its own success may want some control over the business’s management. An employee may want a share of the profits but may not wish to be directly involved in the day-to-day management.
Some business entities may be limited by law as to who can own their shares. For example, a professional corporation may have shares owned only by individuals licensed to provide its type of professional services.
What business forms are most attractive to investors?
Investors want to minimize their risk. Generally, a business entity that shields investors from liability is preferable.
In a partnership, an investor becomes a partner by contributing capital. A partner has the right to share profits, but partnership debts are also shared by partners.
A limited liability partnership (LLP) can receive investment contributions from either general partners or limited partners. A general partner has no liability shield. A limited partner’s liability, however, is limited to the amount of his or her contribution. Members in a limited liability company (LLC) also enjoy a liability limitation.
Only corporations provide a liability shield to all investors. Corporations can also issue stock either as voting shares (which allow shareholders some control of the company) or non-voting shares. A corporation can issue just a few shares to a small number of shareholders, including investors, or it can make a public offering to the broader market of investors.
Is a business goal to raise investment capital without giving up control of the company?
Several business forms allow a company to balance its desire for financing with its desire to retain control within a select group of individuals. In an LLP, only general partners exercise management control. A corporation can issue several types of stock, including voting and non-voting. The sale of non-voting shares can prevent dilution of certain shareholders’ controlling interests.
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