Starting a new business requires significant decisions.  One of the biggest and most important is the business structure, especially if you are looking for venture capital funding.  Your business structure is the legal form it takes in operation.  As an entrepreneur, you need to carefully consider the different options so that your business will most likely succeed.

In order to focus on a proper business structure, you need to ask yourself some important questions.  Do you want to avoid personal liability if the company is sued?  How do you want to pay taxes?  Will you have a partner?  Will your business operate on a national or international level?  Questions like these can help you choose the right business structure.

Below are the most popular business structures that operate in the United States.  Take a look at the pros and cons of each to determine which one is ideal for your start-up venture.

Sole Proprietorship

Most small businesses are a sole proprietorship.  A sole proprietorship is a one-owner business.  The owner and the business are inseparable.  Though the owner reaps all benefits of the business profits, he or she is also liable for all debts, taxes, and potential legal judgments.

Depending on the state, a sole proprietorship generally does not need to be a registered business entity.  However, registering a business name with the Secretary of State in which you conduct business is wise.  Also, acquiring all necessary business licenses should not be overlooked, even with a sole proprietorship.

Partnership

A partnership is similar to a proprietorship, only there are two or more business owners.  A written agreement is not required, but should be drawn up for the benefit of the partners.  With any partnership, federal and state income tax is “passed through” to the partners who are liable for the taxes on earnings.  The partnership itself does not pay taxes.

A Limited Partnership (LP) is a type of partnership that requires complicated paperwork and state registry.  A limited partnership is usually run by one “general partner” and has one or more “limited partners.”  Limited partners are usually the investors who do not participate in the day to day operation of the business.

Corporation

A corporation is a registered legal entity that is separate from the owners and prevents the owners from having any personal liability in company debts or judgments.  However, a corporation must pay taxes on corporate profits, and all shareholders must pay taxes on dividends earned through the corporation as well. 

There are three main types of corporation:

• Private corporation – This is a company that is registered with the state of headquarters and is owned by private investors.  Each investor purchases a “share” in the company.

• Public corporation – This type is seen on public stock trading markets, such as Dow Jones or NASDAQ.  Investors also own shares in the company, but publicly traded companies have a great deal more federal regulation.

• Non-profit corporation – A non-profit organization is a type of corporation that performs charitable, educational, scientific, or religious type of business.  There are no “owners” who buy stock, but the company is overseen by a board of directors.  Non-profits can raise funds from grants and donations and do not pay taxes since there is no “profit” on the operations.

Limited Liability Company (LLC)

An LLC has elements of both a corporation and a partnership.  Like a corporation, an LLC is must file its entity through Articles of Organization with the state Secretary of State.  Owners of an LLC are “members” who have limited liability, but have a say in how the company is run.  However, similar to a partnership, all profits are passed through to the members, who then must pay the government on their share individually.  The LLC structure has become one of the most popular types with its easy form of ownership and tax status.

For tax, liability, and venture capital funding reasons, it is important to choose a business structure that will serve your endeavors well in the present and into the future.  Generally, corporations or LLCs are most ideal for securing venture capital, as you give your business room to grow and gain market share. 

Are you an entrepreneur with a business idea?  If you need access to large funding amounts to start or grow your entrepreneurial endeavor, you may look to a venture capital firm for seed money.   To increase your chances of securing funding, it is important to understand what venture capitalists seek.    

1. Enthusiasm and Passion

Beyond a great business plan and business idea is the person(s) behind it.  VC firms don’t just lend money to a business.  They invest in a person or team who can make the business work. 

Of course, it helps to have a pedigree of business experience and trail of success.  Showing that you have succeeded in the past or extensively understand your industry is a good starting point.   However, venture capitalists know that the entrepreneurial ventures that succeed are the ones with a leader who is enthusiastic.   You and your leadership team need to be passionate about your business idea and growing your little company to great heights – and have an ability to clearly show that passion to your VC firm.

2. Dedicated Focus

Your experience and passion should also translate into a commitment.  An entrepreneur who is committed to his or her business watches the evening news and determines how events may affect the business.  With commitment comes pinpoint focus and a plan to make it work.  Show your venture capital firm that you have a plan and are focused in achieving your goals.

3. An Exemplary Team

One person does not a business make.  A great leadership team is needed to help lead the entrepreneurial venture in all areas, including finance, marketing, and human resources.  Assemble a team who has proven experience and success in their area of expertise.  A good team will also share your enthusiasm and focus in making the business succeed.

4. Unique Innovation

Highlight your innovative difference to VC’s.  Aside from the people who run the business, venture capitalists also look for innovative issues that make your product or service stand out.  Don’t just create another proverbial mousetrap.  Develop a business product that is not currently on the market or has unique qualities compared to existing products.  You could also develop innovative production techniques or marketing strategies. 

5. An Outstanding Product

Finally, a venture capital firm will want to invest in a business with a great product or service idea – one that will grow into a big hit with consumers.  Only with tremendous growth can a VC firm expect to make their return on their investment.  Make sure you develop a product or service that has big potential for large markets if you want VC funding.

The economy is gloomy – but not so gloomy that venture capital firms are holding off from making investments!  Entering a market segment may be tough to acquire new consumers who are saving more than spending, but VC firms are saying that a good business idea is always a good investment option for them, even in tough economic times.

Experienced VC firms know that there is always consumer interest in a great product or service.  However, a startup company may have a tougher time acquiring VC funding due to the larger amounts of capital needed.   In today’s economy, venture capital firms are choosing fewer startups and focusing only on those who have the best chance at survival.  Many VC firms are widening the gap from startups and investing more in Series A or Series B stage companies that have a proven track record of success.  

Why Business Stage Matters

Startup companies are still in development, adding members to the leadership team, performing market research, and performing product development and testing.  Usually there is no revenue coming in, but large amounts of capital are needed from VC firms to continue the business launch.  Due to the risk of failure or delayed success, and the higher potential of loss on a large investment, VC firms look more toward Series A or Series B financing.

Smart and savvy entrepreneurs should be able to build a team, develop a product or service, and launch their business without the need for VC funds.  Even if it means bootstrapping and raising capital from friends, family, and partners, there are ways to acquire funding to get a business off the ground.

Once a business launches and gets initial traction, there is better potential for success.  Management is in place and employees are working.  Business is coming in, but profit may not yet be experienced.  It is at this Series-A stage that many VC’s will take a look at new businesses and invest with less risk than a true startup.

Series-A vs. Series-B Funding

What do you need in your Series-A business to acquire VC funding in contrast to a more experienced Series-B business?  Hope!  In a Series-A stage, companies have not yet reached their full potential, and therefore, hope for significant profits and growth still exists.    

Series-A funding can help a business take off into breakeven territory and even profitability.  Funds from Series-A financing are generally used to increase productivity, cut costs, build infrastructure, and push distribution and sales. 

With a growing company, a VC firm can receive a greater return on their investment than with an already profitable Series-B company.  If you have hope, you can gain respect by building a company from the ground up and keep the momentum going.  And that hope can translate into a successful VC financing effort.

Your search for venture capital should be focused and directed at particular venture capital firms that stand the greatest chance of helping your business succeed.  Thousands of VC firms exists and are located all over the country.  Each one has specific elements they look for when distributing their VC funds.   How do you choose a potential group of venture capitalists who are most likely candidates for accepting your business proposal?

1. Location

Location may be an important key element for a VC firm.  A VC firm may only invest in companies that are within proximity of the VC headquarters.  It may be 100 miles or perhaps 500 miles.  If proximity is not relevant to a particular VC firm, they may also choose potential new businesses that are only located in larger metropolitan areas.  Know the geographical limitations of your potential VC firm before submitting a business plan for perusal.

2. Sector

What is your business type and what sector will you serve?  Many VC firms have specific business sectors that they will invest in, such as high-technology or healthcare.  When looking at a pool of potential venture capital firms that you would like to pitch, narrow your pool to those that invest in your business arena. 

3. Business Stage

In what stage is your business?  Startup?  Expansion?  VC firms will often specify that they only invest funds in startups, or maybe just in companies who need a money bridge before an IPO. 

A startup company puts the VC firm in greater risk for loss due to the potential for failure.  However, the returns and rewards are better when they do succeed.  Conversely, some VC firms will invest conservatively in already existing businesses with a proven track record, but is ready to make a large growth effort.  Know which stage your business is in and seek VC funding from groups that focus on your stage of growth.

4. VC Partners

Most venture capital firms are financed by investing partners.  Know who the partners are and which areas of experience each has.  By choosing a VC firm with partners who have experience in your business idea, you may have a better chance at getting accepted for funding.

5. Portfolio

Take a look at the investment portfolio of a VC firm.  You may find that they are diversified in a number of different market segments, but some may have primary sectors in which they invest.  Try to find a firm who has invested in businesses similar to yours and were successful.  Good experience in an industry could determine that they will continue investing in that industry with your business.

6. Assets

If you are an entrepreneur with a startup business who needs many cycles of capital funding, take a look at VC firms with adequate assets themselves.  You may need early stage technology development, marketing research funding, startup funding, and then progress onto first or second stage funding.  Make sure your potential VC firm will be able to follow your business along its path of success.

Where will your business be located?  This decision is one that must be made carefully.  The geography of your business headquarters, as well as the state of the legal business entity’s registration, may make the difference in whether your company will receive VC funding.

Many VC firms have specific guidelines and policies that not only determine in whom they invest, but also where they want to invest money.  And it may have nothing to do with your business idea.  A quality business that fits VC guidelines, but not the geography, may not be chosen as a funding option.  Therefore, you should always know in advance whether a VC firm has specific geographical guidelines.

Why is location so important?  Below are some of the typical reasons VC’s have geographical limitations.

The Cluster Effect

Why is it that most software or technology companies are located in the Silicon Valley in California?  Since the late 1990s, tech firms have clustered around the Silicon Valley area.  Giants like Apple and Google are headquartered there.  Some say that the locale provides the best talent, and thus, tech firms have the best chance to succeed in that area.  A VC firm may determine that if they invest in tech or software business, it will be only in the northern California area.

A Balanced Investor Portfolio

Venture capital firms also have investors to whom they must answer.  Investors that contribute money to a venture capital firm want security in knowing that not all their proverbial eggs are in one basket.  Subsequently, a VC firm will balance a portfolio over a geographical range.  If one region of the country hits on hard economic times, other businesses in different areas will pull the slack from disappointing results elsewhere.

State Laws and Regulations

Have you ever wondered why so many financial and credit companies are located in Delaware?  The corporation laws of that state are the most relaxed in the country, and they allow financial firms much flexibility in managing corporate policies and interest rates.  Since interest rate limits that a company may charge are based on the legal state entity status, many financial companies choose Delaware in order to charge higher rates.

The state you chose to register your business can be a key decision.  Like the example above, a financial firm will have greater options if they become a Delaware corporation.  You should determine how your business operations will best succeed in a perfect world of little regulation.  If you discover that the state you currently reside in does not offer the flexibility you require for your business, consider registering it in another state.

Venture capital firms can be picky about what businesses they chose to invest in and in what states they operate.  Usually a VC firm will know the best regions for a particular business.  Take a look at your potential set of venture capital firms and research each one to know what regions they prefer and by what type of business.  Your state headquarters could make the difference in obtaining much needed venture capital funds.