Finance for Small Businesses

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Equity Financing for Small Businesses-2

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Rather than racking up debt to finance your business, you can give ownership in exchange for the money you need. Learn what forms of business and what equity financing options can work best for your business.

Understanding Equity Financing

Equity financing simply means selling an ownership interest in your business in exchange for capital. The most basic hurdle to obtaining equity financing is finding investors who are willing to buy into your business. But don't worry: Many small business have done this before you.

The amount of equity financing that you undertake may depend more upon your willingness to share management control than upon the investor appeal of the business. By selling equity interests in your business, you sacrifice some of your autonomy and management rights.

The effect of selling a large percentage of the ownership interest in your business may mean that your own investment will be short-term, unless you retain a majority interest in the business and control over future sale of the business. Of course, many small business operators are not necessarily interested in maintaining their business indefinitely, and your personal motives for pursuing a small business will determine the value you place upon business ownership. 

The bottom line usually boils down to whether you would rather operate a successful business for several years and then sell your interest for a fair profit, or be repeatedly frustrated in attempts at financing a business that cannot achieve its potential because of insufficient capital.

The Impact of Choice of Entity on Equity Financing Options

The specific types of equity financing available to you are, to some extent, determined by the organizational form of your small business. Your choice of business form, or "entity," for your small business involves a wide spectrum of other important issues, such as the degree of personal risk involved in the type of business, tax considerations and the need to attract good business managers.

Each entity has its own unique characteristics:

  • Sole proprietorships are the simplest businesses to form, but equity financing is limited to the owner's assets.
  • General partnerships require at least two owners, so equity financing possibilities are greater than in proprietorships.
  • Limited partnerships can provide limited liability to some of the owners, if they're not active participants in the business.
  • Corporations provide the most flexible possibilities for investors.
  • Limited liability companies/limited liability partnerships are business entities that combine favorable tax treatment with limited legal liability for the owners.

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