Incorporating Can Open Up Sources of Capital

Incorporating your business may be preferable to operating it as a partnership or sole proprietorship because of available corporate tax benefits and the limitations placed on personal financial liability. Generally, corporate stockholders are not liable for claims against the corporation beyond the amount of their original investment.

A small firm that incorporates issues common stock. Typically this stock is privately held by a limited number of stockholders. Purchasers of common stock become partners in the firm and may, if they wish help determine the firm’s operating policies. A significant benefit of incorporating is that it can also open up other avenues of capital for your business.

Beyond issuing common stock, corporation have other built-in investment vehicles they can use to attract capital. One is to offer preferred stock. This type of stock gives its holders a claim on repayment over holders of common stock, in the event the business fails. Those who hold shares of preferred stock are usually limited to receiving fixed dividends and may lack voting privileges.

Another investment opportunity for the small company is the offer of convertible debentures. These are debt instruments that offer the option of paying interest in the form of issuing common stock. Warrants, similar to convertible debentures, allow investors to buy a set amount of stock prior to the warrant expiration.

Because debentures and warrants are both debt, in case of business failure, they must be paid before holders of common stock and preferred shareholders are reimbursed. It’s crucial for small business owners to consult an attorney, banker or accountant before making such offerings. Before you incorporate look at the tax implications of structuring your firm as a corporation. Access to capital is an area of concern for most entrepreneurs, incorporation and the issuance of debentures and warrants can provide ready capital to the small business.

If you would like to discuss incorporation, access to capital or debentures and warrants, contact the SCORE Association (Service Corps of Retired Executives). More than 12,000 volunteer, business counselors donate their time and expertise to assist entrepreneurs. SCORE is a nonprofit organization with 389 chapters throughout the United States. SCORE counseling is provided as a free and confidential community service. For a referral to the SCORE chapter nearest you, call 1 (800) 634-0245.

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