There are many decisions to be made in regards to incorporating. One such decision that may sound overly simplistic is how to finance your new venture. However, this is an often overlooked aspect that could determine how much money may belong to the corporation when it is time to decide to make distributions. The two main ways to finance a corporation are through debts, or borrowing money and equity, or ownership in the form of shareholders.
When deciding to finance your venture using debts, there are pros and cons. One major benefit is that as the owner, you know exactly how much is to be paid back. There are fewer owners to have to be held accountable to, and therefore fewer owners to have to share in the dividends. A major disadvantage of financing using borrowed money is the interest that must be returned to the lending institution. Additionally, these debts will be due no matter the relative health of the corporation. Unlike being accountable to shareholders who only receive payment when the corporation is profitable, a lending institution must receive payment regardless of the corporation’s actual ability to pay.
Debt financing can come in several forms. The most common is a traditional bank loan, where a corporation applies to a bank or lending institution for a loan. A corporation may also seek out different types of bonds, including traditional bonds (secured obligations), debentures (unsecured obligations), and bearer bonds (which are now considered illegal because it lends itself to tax evasion). The amount of debt in a corporation is called leverage, and can affect the spread of possible returns.
Other popular means of financing a corporation may be through equity, or issuance of shares. Shares can take on many forms. Some are authorized in the articles of incorporation, while other times corporations may turn to Initial Public Offerings (“IPOs”). A corporation may also determine whether or not a share is considered common or preferred, and whether it is redeemable or convertible, among other considerations. A major benefit of equity financing is that the corporation is liable to make payments only when it is able to, unlike when taking out loans.
Deciding how to finance your corporation is a major decision that should not be taken lightly. Be sure to do your due diligence in deciding whether debt financing or equity financing, or some combination of the two, is best for your corporation. Consulting with the right legal team can ensure that you make the best decision. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.
