There are seven stages in the life-cycle of a business:
Assessment (ideas, resources, market)
Seed (nurturing the idea)
Discovery (discovering a sustainably profitable business model)
Proof (proving the business model)
Most people starting this journey for the first time think they will go directly from brilliant business idea to execution of a highly lucrative business model. What they miss is all the hard work in between that it takes to nurture their idea, discover a viable, sustainably profitable business model, prove that model and then scale that model into the highly lucrative machine of their initial dreams.
In addition, most of the business startup press, especially the maximum-buzz high technology startup media, concentrates on the Lean Startup methodology as applied to the business model discovery phase. http://theleanstartup.com/ This leads some first time entrepreneurs to believe that as long as they optimize the business model discovery stage of the journey, nothing else really matters. Unfortunately, this is not the case.
Which type of corporation is best: LLC, S corp, C corp, etc.
First, an important disclaimer: I am not an accountant. I am not a lawyer.
This is a topic that affects your tax liabilities and your legal status so you need to educate yourself on the basics of this topic as well as discuss this in detail with an accountant regarding the tax implications and an attorney regarding the legal ramifications.
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There are three main types of corporate entities that you will consider as an entrepreneur, all of which provide liability isolation but each with different tax consequences:
LLC and its variants
The best type of corporation for your business depends on many factors. In a very broad sense, if you are planning to seek outside equity (stockholder) investors to fund your business, then a C corporation will probably be best. A C corporation will be a requirement for any institutional investor and most angel investors. If you are planning a small-scale, lifestyle business and just need some liability protection, an LLC can be very inexpensive to create and maintain, while retaining simple, low-cost tax preparation and accounting costs.
Cash flow is the top challenge for just about every new business in the world.
Most people who are new to business are fearful, if not overwhelmed, by the financial side of the business. Not many new entrepreneurs have a working understanding of the financial terms, much less the reports, used by business finance professionals. How many new entrepreneurs understand the differences between and the implications of cash versus accrual accounting? Not many.
This is a problem because people tend to avoid, downplay and fear that which they don’t understand. Accounting and finance are no exception. Entrepreneurs who have little to no understanding of finance and even less available time to go up the learning curve on it are naturally vulnerable to financial challenges, if not disaster, in their businesses.
The key to overcoming this is to focus on cash flow, because that is what will kill your business.
A relatively recent form of raising money to start or grow a business is crowdfunding. Crowdfunding is crowdsourcing for money. With crowdfunding, you take in money from a large number of people, each of whom contributes a relatively small amount. Lots of people each invest small amounts of money, thereby spreading the risk of any one business failure among a large number of people and providing anyone who wants to be in the game the opportunity to share in the upside of a big startup win.
While this sounds logical enough, taking money from others in exchange for a piece of your business is a highly regulated activity in the U.S. So many scam artists have fleeced so many widows, children and inexperienced investors out of their life savings to fund non-existent or otherwise fraudulent businesses that the Securities and Exchange Commission (SEC) has made it very, very challenging to accept money in exchange for equity in your business.
The SEC restricts private investments for equity to people who are “accredited investors.” Accredited investors are high-net-worth individuals and people who can prove they are sophisticated, informed investors. The pool of accredited investors is not tiny, but it’s not the millions to billions of people who are available via internet crowdfunding.
The SEC is currently reviewing their restrictions and may authorize an officially sanctioned form of crowdfunding. In the meantime, it is caveat emptor, meaning it is incumbent upon you to ensure that any money you take from anyone in exchange for equity is in compliance with any and all applicable regulations.