Fueling Growth: How Your Business Structure Influences Access to Capital

At the heart of every successful business is a decision that often goes unnoticed: the choice of business structure. The business structure you select does more than determine the operational rules and legal contours of your business. It also sets the stage for how you’ll raise funds, manage your resources, and expand. 

In this article, we’ll explore the different types of business structures and how each type impacts your funding options, along with tips for choosing the business structure that will work best for your funding needs.

How Your Business Structure Shapes Your Financing Options

Are you hoping to attract angel investment or venture capital to kickstart rapid growth? Or maybe you’re interested in tapping into microloans for a slow but steady start. Here’s how the different business structures can shape your business’s finances and access to capital.  

Sole Proprietorships

Choosing a sole proprietorship puts you in the driver’s seat, with the freedom to control your business without the operational and legal red tape of more complex structures. It’s also straightforward and relatively inexpensive to set up—all factors that have made it the go-to choice for many new entrepreneurs. 

Financing considerations: Your sole proprietorship is uniquely tied to your personal finances. Essentially, your personal and business financial worlds are one and the same. While this means you can tap easily into your own funds or personal credit to fuel the growth of your business, it also puts your personal assets at risk. And attracting investors is tricky, since there’s no business entity for them to invest in. 

Partnerships

Using a partnership as your business structure can allow you to pool resources, talent and ideas with others. Whether you’re considering a general partnership, a limited partnership or a limited liability partnership, each type comes with its own set of rules and implications that influence how you manage your business. 

Financing considerations: The type of partnership you choose will impact your funding avenues and financial management:

• General partnership. Similar to sole proprietorships, general partnerships offer straightforward funding options (dipping into personal savings and credit, for example) that can put your personal assets at risk. While each partner can contribute capital, apply for loans or secure credit lines, this comes with joint and several liabilities—meaning each partner is individually and collectively responsible for all the debts and obligations of the partnership.
• Limited partnership (LP). In an LP, general partners manage the business and limited partners contribute capital without active involvement. This allows you to attract external investors who are shielded from the day-to-day business risks, making LPs a strategic choice if you wish to raise capital without affecting your control of the partnership. 
• Limited liability partnership (LLP). Not only are your personal assets protected from the partnership’s debts in an LLP, but you’re also shielded from your partners’ potential missteps. For lenders, this offers a measure of reassurance: The risks of recovering debts are lower since they won’t need to untangle personal assets if things go awry. But like a general partnership, LLPs don’t hold the same charm for investors, who are usually looking for equity stakes that LLPs can’t offer. 

Limited Liability Company (LLC)

Opting to structure your business as an LLC gives you limited liability protection for your personal assets without hampering your operational flexibility, so your business operations stay manageable and adaptable. It’s an ideal choice for entrepreneurs who want a legal and financial safety net without the more complicated formalities of the corporate structure.

Plus, LLCs offer the simplicity of pass-through taxation, where profits and losses are reported directly on members’ personal tax returns. 

Financing considerations: An LLC’s limited liability protection is appealing to lenders thanks to the clear separation it creates between personal and business assets. You also have the option to raise capital by offering membership interests, although external investors tend to be deterred by pass-through taxation, as this can complicate their personal tax situations. Some investors, however, may be on the lookout for investments in specific niches or with particular tax strategies, in which case your LLC could be an attractive opportunity.

Corporations

When you set up a corporation, you’re creating a separate legal entity that’s distinct from its owners, offering you a shield for your personal assets as well as a structured approach to business management with clear roles, responsibilities and processes.

Known in IRS lingo as a C corp, corporations must adhere to strict regulatory requirements, including regular board meetings and detailed record-keeping. While more demanding, this structured governance can lend a level of credibility and scale to your venture, especially as you grow.

Financing considerations: Financing in the world of corporations is a significant advantage because you can issue stock, a powerful tool for raising capital by selling ownership shares in your corporation. This not only broadens your funding avenues but also diversifies risk. Plus, corporations often find it easier to obtain loans and lines of credit; their structured governance and established legal framework can make them more attractive to lenders.   

A Note About S Corps

An S corp isn’t a type of business structure, but a special tax status granted by the IRS. By electing S corp status, profits and losses pass through directly to shareholders’ personal tax returns, and your business can avoid the double taxation that affects the standard corporate structure. An S corp election can be a good choice if you’re looking for the operational advantages of a corporation with the tax benefits of a pass-through tax entity. 

Financing considerations: Obtaining financing in an S corp setting is nuanced. While you can’t issue different classes of stock to attract a variety of investors, you have the ability to have up to 100 shareholders, which offers a substantial pool for equity financing. (Foreign investors are off the table: Shareholders must be U.S. residents or citizens.)

As for loans and credit lines, banks view the separation between personal and business finances favorably, potentially making it easier for corporations to secure traditional financing. 

An Illustration: Akisha and Alex’s Stories

To illustrate the impact business structure has on financing, let’s take a look at two entrepreneurs, Akisha and Alex. Both have groundbreaking ideas, but while Akisha’s new business skyrockets, Alex’s struggles to take off. The difference? Their business structures.

Akisha launched a tech startup focused on using AI to revolutionize the way small businesses manage inventory. Because she chose to incorporate, she was able to issue stocks and attract a wide range of investors, from tech enthusiasts, AI-focused venture capitalists, and strategic partners interested in supply chain innovations. This let Akisha secure the substantial capital needed to refine her tech and quickly establish a dominant position in the market. 

Alex, on the other hand, founded a tech consultancy that leveraged augmented reality to enhance retail experiences, a novel idea with significant market potential. But his sole proprietorship model led to financing hurdles, as potential investors were put off by the blurred lines between personal and business finances, the lack of a more formal business structure, and the business’s inability to issue stock—leaving Alex struggling to find the funding necessary to scale his innovative service. 

Tips for Choosing a Finance-Friendly Business Structure

Whether you’re eyeing a loan or seeking investors, the structure you choose can open doors to funding—or build walls. Here are some practical tips to help you select a business structure that not only fits your vision but also supports your financial goals.

• Align with your business model. Pick a structure that feels like a natural fit for the way you run your business and connect with your customers. 
• Consider your industry. Opt for a business structure that’s common in your industry. This can have a positive impact on credibility, customer trust, and investor interest.
• Plan for your funding needs. Some structures are like magnets for particular types of funding, so think about how you plan to get that all-important cash injection.
• Be ready for growth. Dream big—make sure your structure won’t hold you back when it’s time to expand. 
• Think about taxes. Taxes might not be fun, but they’re crucial. You want a structure that aligns with your financial goals and won’t give you a headache at tax time. 
• Manage your risk. How comfortable are you with risk? Your business structure should protect your personal assets to your comfort level.
• Draw in investors. If you’re looking to attract investors, pick a structure that they love too. 
• Keep it manageable. Don’t get bogged down with a structure that’s too complex. You want to spend time growing your business, not tangled in red tape. 
• Prepare for the future. Where do you see your business in the future? Your structure should support your long-term exit or succession strategy. 

Choosing a business structure is more than a to-do item on your startup checklist. The structure you select will influence your access to capital, your ability to grow and your success in the years to come.

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