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.