Structuring a Business as a Corporation is the Right Choice for Most Startups
Structuring your business as a corporation make even more sense if you are considering equity crowdfunding as a way to raise money for your company.
Equity crowdfunding is finally here. To take advantage, you need to structure your business as a corporation for the following reasons:
You will have less investor interest if your company’s investment opportunity is perceived as unusual, exotic or non-standard. An important aspect of the investment opportunity will be the legal structure of your company and what legal rights the investors receive in exchange for the money that they invest.
As a general matter, investors understand how a corporation is structured – the stockholders own the company, the Board of Directors provide managerial oversight and direction, and the executive officers carry out the day-to-day operations. The investment due diligence process will be more efficient, and potential investors will have fewer questions about the legal structure, if your business is set up as a corporation.
Investors also have more experience investing in corporations and they are more familiar with the financing structures and documentation used to make investments in corporations. Again, the corporation and commonly used deal structures will facilitate investment through equity crowdfunding.
From a timing perspective, you likely will not have an extended opportunity to explain complex legal or investment structures, especially if equity crowdfunding investors are considering other investment options. Don’t complicate or close the window of potential investor interest – structure your business as a corporation.
An equity crowdfunding financing involves the accumulation of small amounts of investment from a large number of investors. And at the end of a successful equity crowdfunding financing, your company could have dozens if not hundreds of investors. You therefore will need to have the proper legal structure and administrative infrastructure to handle the increased number of owners of your company.
You’re in luck, because the corporation is designed to handle a large number of stockholders. Remember that almost all public companies, with their large numbers of stockholders, are structured as corporations. If you structure your business as a corporation, then you will be able to manage, transfer and update the ownership interests of the stockholders more efficiently and cost-effectively than with other legal entity structures.
Raise Money More Efficiently
Structuring your business as a corporation will give you the most straightforward and cost-effective way to raise money, both during the fundraising process and once your company has received equity crowdfunding investment.
If you are thinking about starting a business and are serious about raising money through equity crowdfunding, then you should set it up as a corporation. Or, if you already have launched your company and have it organized as a partnership, limited liability company or sole proprietorship, then you should give serious consideration to converting the legal structure to a corporation in order to take advantage of the money-raising opportunities that equity crowdfunding will provide.
How are you preparing for equity crowdfunding and what type of legal entity do you plan to use to raise money?