Incorporating a small business may seem like a necessary step that entrepreneurs want to get done fast, but this process should not be taken lightly. A recent case study explored in Entrepreneur magazine demonstrates the value of smart business formation.
One entrepreneur – Marie – recently contacted Entrepreneur magazine’s affiliated lawyer, Nina Kaufman, to close a deal with investors interested in taking an equity piece of her company. While this is an exciting step for a small business owner, this specific situation brought to light more flaws in Marie’s business than successes.
The major problem was that Marie had formed an S-corporation. As Kaufman told her, an S-Corporation is not a legal form of business that permits passive investors. The investors were not interested in becoming active participants, nor did they care to wait while she changed her status to a C-Corporation.
In the end, this shows that even finding the appropriate investors does not guarantee positive results without the right legal foundation. As experts at Venture Beat point out, an S-Corporation is beneficial for receiving “pass-through” tax treatment, but it does not enable entrepreneurs to seek funding.
In order to avoid Marie’s mistakes, entrepreneurs might be well-advised to seek professional services to learn how to incorporate their businesses.