60 | How to Write a business Plan
Corporations and Red Tape Corporations bring several complications—
only after corporate taxes have been
but most entrepreneurs consider the costs
paid. Dividends then become personal
and inconvenience a small price to pay for the
income to the shareholders and are
ability to raise the capital they need. I only summarize a few issues here: • Record keeping in corporations.
taxed at personal rates. • Selling shares in your corporation. Both federal and state regulatory
Keeping your shareholders informed
authorities have many rules and
and your corporation in good standing
regulations governing sales of
means that you have to perform certain
corporate shares or limited partnership
legal acts and pay various taxes and fees.
interests. The bottom line of all these
It’s more complicated and expensive
regulations is this: You can’t take any
than doing business as a sole proprietor.
money into your venture until you
• Taxes and corporations. You can take
comply with the appropriate rules.
money out of your corporation in only
These rules try to protect investors
two ways: salaries and dividends. Both
from crooks and con artists and also
payments have to be approved by your
try to make it relatively easy to raise
Board of Directors and entered into
money for legitimate ventures. Before
the minutes of the company. Salaries
selling any security, or soliciting for
become your personal income and are
the sale of any security, make sure you
taxed at your personal rates. Dividends
have complied with the appropriate
are payments to shareholders made
regulations.
Loans and Equity Investments Compared To raise money for your new business, you must decide whether you prefer to borrow money or sell part of your project to an equity investor. Often, you may not have many options. The person with money to lend or invest will obviously have a lot to say about it. But you should know the tradeoffs you normally make by preferring one to the other:
• Loan advantages. The lender has no
profit participation or management say in your business. Your only obligation is to repay the loan on time. Interest payments (not principal payments) are a deductible business expense. Loans from close friends or relatives can have flexible repayment terms. • Loan disadvantages. You may have to make loan repayments when your need for cash is greatest, such