Appendix C - Small Businesses:

Summary of Finance Options

Maximum Control------------------------------------------------------------------------Minimum Control

  Internal Financing Commercial Bank/SBA Loan Strategic Alliance Private Equity Placement - Non-VC Joint Venture/ Partnership Venture Capital
Structural

Pros

Maximum simplicity

No equity dilution

No loss in control to lender as long as payments are timely made Leverages complementary resources without change in structure Strengthens balance sheet

Gives start-up adequate time to succeed

Receive equity infusion from partner

Retain some control or veto power

Often the only source for serious equity capital

Helpful in setting the stage for an IPO

Structural Cons Increased risk of failure when under-capitalized Requires established credit

SBA paperwork can be excruciating

May develop marketing dependence without control Very difficult to sell to investors

Increased time and costs dealing with outsiders

Dilution

Requires extensive negotiations over control and ownership

Must concede some control

VC will require control or veto power

Very expensive capital, may require an IPO exit strategy

Tax

Pros

Free choice of tax entity Free choice of tax entity Free choice of tax entity Pass-through tax treatment still possible with LLC or S corp. with single class of stock "Check the box" reg. ensures partnership tax treatment for LLCs, LLPs 50% capital gain exclusion if a C corp. is used (§1202)

C corp can also accommodate tax exempt investors

Tax

Cons

None None None May create second class of stock - no S corp. option Thorny tax issues where services are contributed in lieu of capital C corp structure may be required - double tax issues

© 1999 Scott C. Withrow. All rights reserved.

NOTE: This site includes a summary of certain legal issues facing small businesses today. This site does not, and is not intended to, give legal advice. Reference should be made to full text of the statutes and regulations for complete analysis. Consultation with competent counsel is strongly recommended.