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5 Common Mistakes When Starting a Business
Formation — the Legal Structure of your Business
If you are thinking about starting a business, or if you’re a serial entrepreneur adding a new line of business, one of the first things you’ll have to do is to determine your business legal structure.
The four most common types and basic forms of business legal structures in the United States include:
- Sole Proprietorship
- Limited Liability Company or an LLC
This post is intended to help you understand which option may be the best fit to meet your business and personal goals and to explain the key differences among the various business structures. Read more…
Entrepreneurs growing a business from Startup, to Main Street Small Business, to Middle Market, to an IPO typically turn to local community and regional banks, as well as Credit Unions, for business capital.
Such loans are offered to businesses based on three factors known as the three C’s in bank lending:
- Cash Flow
- Credit History (or Credit Score)
In recent years, commercial banks and credit unions have tightened up their lending/loan criteria to such a degree that obtaining loans is restricted to those businesses with a proven track record of profitability. The last two years financial performance is of utmost importance to loan underwriters. And the underlying credit score of the business owner(s) serves as the guidepost for lenders. Without a good personal credit score, certain lenders will simply opt out or decline the loan request for proposal.
In such cases, the business is forced to seek alternative lending companies at higher costs of capital. Bank and credit union term loans are best suited to permanent financing needs. In other words, if the entrepreneur needs to finance an asset or investment with a useful life of several or more years, term loans are most appropriate. Likewise, if an improvement to real property is in need of financing, a long term, such as 10 years or more is advisable.
Banks and credit unions also offer qualified businesses a Line of Credit to meet short-term or day-to-day cash needs. Such operating funds, made available through a line of credit, allow the entrepreneur to pay his trade invoices and to meet payroll while waiting for his customers/clients to pay their invoices. Without a business line of credit, most businesses, small and large alike, would be forced to close their doors. Lines of Credit are in many cases secured by and tied to trade Accounts Receivable.
When a business does not meet the Cash Flow and Collateral requirements to qualify for a loan, a Small Business Administration (SBA) Loan may be offered. In such a case, the bank makes the loan to the business and the SBA stands behind the bank to guarantee a portion of the loan in case of default.
When a business and its owner is unable to qualify for a traditional bank loan, alternative forms of business capital may be available through other sources.
Setting Up Multiple Businesses
In part one of this series, we discussed the various options to incorporate multiple businesses while keeping each business as a separate entity. It’s worth noting that having a separate legal business entities can be costly when it’s time to file your taxes as most CPAs charge an additional fee to file each business entity’s tax returns.
Additionally, you may want to develop a line of businesses that are closely related in terms of the products and services offered, the industry, or even its customers. In such a case, it may make good sense to create a single brand that will unify the various business operations. Marketing can be simplified under this type of multiple business structure and the businesses could flourish under a unified brand.
If you find your future plans include the addition of similar lines of business to your existing business (or the business entity you are about to form), there may be a simple way to structure multiple business entities which could reduce tax filing costs and administrative time in the future. Read more…
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