Starting a business in South Carolina can be an incredibly challenging process, and in many cases, you need to attract outside investment to secure needed capital. After all, until you have significant revenue being generated, your business will be entirely fueled by your cash reserves.
One of the most popular ways to secure additional capital is an investment by an angel investor. Angel investors look for companies in their early stages and invest in what they believe is going to be a very successful business. Before you schedule an appointment with an experienced South Carolina business attorney to get the ball rolling, here is what they look for in a business structure.
There are many different types of business structures that can be leveraged to begin business enterprises, with some being more attractive to investors than others. The four basic and most common types of structures are sole proprietorships, LLCs, S corporations, and C corporations.
Sole proprietorships are the simplest and often the cheapest way to structure a business. The downside is that it leaves the owner or the proprietor open to legal liabilities in many situations. Angel investors will not invest in sole proprietorships.
LLCs are a structure that provides the business with some tax benefits, as well as the limited scope of liability that a corporation offers. LLCs also create challenges with paying the members wages, and with investor taxation in some circumstances. LLCs are not ideal for angel investing, and they are often not even considered by the investor.
S corporations are able to have several owners, even a corporate owner, and offer some tax benefits over C corporations. The downside is that company ownership is limited, making sustained growth a challenge.
Since angel investors often want ownership or equity in the business, this structure isn’t ideal, though it is possible. Investors will often want to be assured of a C corporation transition at a later date. The pass-through tax advantages can be a double-edged sword, as well.
C corporations are incredibly flexible regarding who can hold stock and the rights of the stockholders, as well as being able to offer different types of stock such as common and preferred. This is also the only possible structure allowed for businesses that will operate in the biotech, life sciences, or pharma spaces.
C corporations are subject to double taxation, however, in the sense that the business will pay taxes, and the stockholders will also pay taxes on corporate distributions. For attracting angel investors, creating a C corporation is the only viable route.
What Else Do Angel Investors Look For?
If you have decided to work with your attorney on incorporating a C corporation, make sure you take into account some of the other factors that will help draw in angel investors. Factors that include:
- Potential for revenue and ultimately, profit
- A sound exit strategy
- Solid management team
- Personal commitments of the business founders
Experienced Professionals Can Help Your Business Start Off Right
Contact us today if you would like more information or have any questions about incorporation.