Have you got a brilliant new idea? Are you ready to roll out a new innovative product? Are you having trouble raising capital?
Before you think about raising capital, let’s take a step back.
What business structure are you planning on using for your start-up?
When deciding what business structure to adopt, a crucial consideration should be whether that structure is conducive to raising capital. Changing your business structure after capital is raised can be very difficult as in many cases most shareholders will need to agree to any changes. Changes to structure also inevitably affect the rights of shareholders. Where shareholders rights are diminished in any way, the shareholders may disagree to changing your business structure.
You need to make sure you consider all possible options before making a decision.
The high risk nature of start-ups usually sees entrepreneurs raising capital through a private equity. This means that a share in the ownership of the business is provided to an investor in exchange for capital. There are many ways to offer private equity including ordinary and/or preferential shares. Entrepreneurs usually wish to have investors who will provide something past money for their business. This includes advice or some kind of expertise in the field in which the business operates.
A corporation is generally perceived as one of the best structures to meet the needs of both entrepreneurs and investors.
Due to the high risk/reward nature of the investment, investors will seek some kind of protection for their investment. Where a business adopts a company structure it will be governed by the Corporations Act 2001 (Cth) and the Australian Securities Investment Commission (ASIC). Under Corporations law directors of company hold an obligation to act with due diligence and in the best interests of the company and its investors, the shareholders. This means that professional investors are more comfortable investing in a corporation as they can rest assured that directors will be held accountable for their actions.
A corporation structure is also favourable for entrepreneurs. Appointing investors as directors of the company can ensure they continue to provide ongoing support, advice and participation in the decision-making process. Operating a start-up under a different structure such as a partnership can often dissuade investment as these offer limited protections against the mishandling of investment.
There are many different types of business structures. Although there are many benefits to setting up as a company, it may not be the best structure for your business purposes. Before you decide on a business structure, you need to consider the pros and cons of each business structure. It is recommended that you seek professional legal, tax and financial advice, to ensure that you choose the most suitable business structure for your start-up as it is a crucial foundation of your business.
Choosing the appropriate structure for your business is a very important decision that needs to be made before you seek capital from your investors. Call LegalVision to discuss all of your options with a startup lawyer!