Every new, and established alike, business needs some investors to get their venture off the ground. Without the initial funding, there would be a lot of startups that would never even get to see their first year in business. A small business will need money all throughout its lifetime to stay afloat, but it’s the first batch of capital earned that serves as one of the most significant milestones in a business’s timeline.
The key to gaining investors is the ability to convince them of your passion and drive to see the success of your one-of-a-kind business all the way through. Aside from that, though, there are some concrete things that look good on paper to investors that make them want to get in on what you have to offer them. One of those things is the type of entity you file your business as. Some entity types are much more attractive to investors as far as what they feel comfortable handing money over to, and one of those entities is a corporation. Why are investors so over the moon for supporting business ventures that are corporations, anyway? It all boils down to the following four areas.
Investors take ownership interest in C-Corporations for stock issuance reasons. S-Corporations are limited to 100 investors, so many investors feel more comfortable investing in a C-Corp business structure to avoid those restrictions. Also on the stock front, some companies want the ability to issue stock options to their employees, and raise capital through preferred stock. Just another reason for investors to head for the C-Corporation route!
Corporations can file a conversion to switch entity types at any time, or withdraw their S-Corp tax status, so it’s not a huge game changer if you filed originally as an S-Corp or LLC, but it’s something to keep in mind. Filing as a corporation comes with an understood sense of flexibility. If, as a business owner, you wanted to try out a different entity type for a while just to see how it affects your business, you can do that with a corporation without any pressure—it’s a good thing to let investors know.
Health Coverage Benefits
If you own a corporation, you can receive tax-free health coverage, as opposed to the S-Corporation, where shareholders are required to report any benefit as income and deduct the premiums from gross income on their personal returns. C-Corporations also have the option of utilizing a medical reimbursement plan. This plan allows the business to pay a fixed amount for any medical costs of employees that normally would be out-of-pocket expenses.
Even the corporation’s downside has an upside!
The one thing that may make investors snub their noses at corporations is the fact that they are subject to double taxation, meaning shareholders would be taxed when earnings are distributed. However, this area is reduced if the company intends to reinvest surplus cash for growth. Additionally, another good thing to keep in mind is that a C-Corporation can accumulate net operating losses, which can offset profits in the future.
Originally published on SmallBizClub