If you're thinking of setting up a small business, there are many things to consider before you launch. The early choice of entity and financial considerations can have a huge impact on your business in the long run so here are a few things to think about, if you're a rookie start-up entrepreneur:
S Corp or C Corp? Do you know the difference between an S Corporation and a C Corporation? If you don’t, then make sure to check with your accountant on this one. For starters, the two entities are taxed differently. An S-Corporation can either be taxed as a flow-through entity or as a regular corporation. If it's taxed as a C-corporation, it's taxed twice-- one time at the corporate level and another time at the shareholder level. How taxes work is only one of the many differences between the two entities though so make sure to do your research.
Another key difference between the two is the fact that S-Corps limit the amount of shareholders and classes of shares. As a result, if your company decides one day that it wants to go public or decides that it wants greater funding (think venture capitalists), an S Corp doesn't always lend itself too well to outside funding prospects.
The last thing you want is to make a wrong decision at such an early stage, and have to deal with it later on when you should be putting your energy into growing your business.
Venture funding, Angel funding or self-funding?
Again, this is an important consideration. If you decide to go the venture capitalist route, you can anticipate receiving more money, but a loss of control over your business. There are no absolute terms for dealing with VCs because each one will have different ones so be wary, but it’s important to understand that they can offer you the most capital.
Angel investors might give less money, and again, you might have to give up some control, but they’re a great option. Angels tend to be groups of people who pool their own money together for particular investments, and decide what to invest in together.
Of course, you can always stick to being self-funded, and retain complete control of your business; but with this you might have to wait a while before money comes in. Each method has its pros and cons, and there’s no way to avoid that.
What to do?
Remember, each situation is unique so you must decide for yourself what’s best. When I was figuring out what to do to get my iOS app off the ground I decided to go to Angel investors, and ended up finding one who was interested in what we were trying to do. He was able to offer us a good deal of guidance and networking introductions on top of the money we were given. Now that the app has been developed, and is on the App Store, I’m starting to speak to Venture Capitalists because they can offer the type of capital I need to quickly increase the pace of the company. For the situation I was in the idea of self-funding didn’t make any sense, but it might for you.
Azeem can be reached at Azeem@supshot.com.