Start Up Capital
Start up capital is the money needed to start a new business. It can be used for an office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense. Funding can come from, your savings, a bank in the form of a business loan, or from an investor, group of investors, or venture capitalist(s).
A big advantage of a sole proprietorship is the high level of autonomy the owner has to run his business. There are no other owners to divide profits with, which allow a sole proprietor to use company funds in any manner. Sole proprietors have relatively few formalities to adhere to and very little regulation from federal, state and local government. However, a major disadvantage of a sole proprietorship concerns the lack of liability protection for the business owner. This means a sole proprietor has a personal responsibility to pay every business debt and obligation.
A partnership of two or more individuals has the ability to collaborate. Partners can share the responsibility of managing the company and share ideas with other partners. Also, partners are not required to file income taxes as a business entity, meaning each partner reports his share of business profits and losses on his personal income tax return. On the other hand, a partnership offers no personal asset protection for partners of the business. A partner may be even liable for the negligent acts of another partner. If the partnership’s business assets do not cover an obligation, a creditor may pursue a partner’s personal assets as compensation for the business debt.
Limited Liability Company
A limited liability company is a hybrid business entity that provides members with limited liability protection from company debts and obligations. Also, members of an LLC are able to divide company profits in any manner, regardless of ownership in the company. This flexibility allows an LLC to allocate profits and losses to the greatest tax benefit of the company’s members. However, a LLC is costly to form and may not be able to raise capital because it cannot issue stock like a corporation. This means an LLC may have to rely on the personal assets of its members to fund the company’s activities.
Corporations provide shareholders, directors and officers limited liability protection for company obligations. A shareholder’s liability for company debts does not extend beyond his investment in the business. Another advantage of a corporation is the company’s ability to raise capital by issuing stocks and bonds. The proceeds of a stock or bond issuance can be used to expand or pay the company’s existing obligations. The downside is double taxation. A corporation must file a business tax return with the Internal Revenue Service and pay taxes on company profits at the company’s applicable corporate tax rate. Later, when the company distributes dividends to its shareholders, the shareholders must pay taxes on dividends received from the business at their personal income tax rates.
A few things to consider when choosing a bank for your business:
- Does your bank have lender authority
- Smaller, regionally focused banks may be better because they know local market conditions
- Rates charged by large financial institutions are usually lower
- Does your bank work well with SBA loan system
- What additional services are available with your account
Some Common Small Business Needs
- Checking account
- Business savings account
- Credit card
- Deposit-only card
- Discounted employee checking accounts
- Online banking
- Lines of credit
- Commercial real estate
- Equipment leasing
- SBA loans
- Wire transfers
- Wholesale lockbox
- Merchant services
- Retirement accounts
- Discounts on hotels, shipping, office supplies