Investor Attraction

Weighing the pros and cons of your new company’s legal structure from the get-go may result in an easier time getting financing. The sooner a firm’s founders consider the preferences of future investors, the more likely that research will pay off, according to Robin Radke, an associate in the corporate finance and transactions group at the Minneapolis-based law firm of Oppenheimer Wolff & Donnelly, LLP.

Radke teamed with Patrice Kloss, a partner in Oppenheimer’s corporate finance practice and financial services industry group to present their thoughts on positioning a company for investor financing at an October event hosted by The Collaborative, a Minneapolis-based group that organizes symposia on business finance topics.

The time to begin positioning a company for future financing rounds, they say, is at its very beginning. Making the right decisions early is typically less expensive and consumes less time, than fixing mistakes later. And it may expand the number of investors who are interested in the firm.

S , C, or LLC

Preparing for financing begins at a company’s inception, with the choice of corporate structure. Companies typically incorporate as an S corporation, a C corporation, or a limited licensed company (LLC).

S corporations, with their pass-through tax structure, are popular with business owners. In an S corporation, company profits are taxed just once—for disbursement. Losses are also passed through, a feature that often appeals to owners looking to offset gains from other investments.

Although they offer owners attractive taxation (or lack thereof), other S corporation rules can make attracting outside investors difficult. Certain types of trusts will invest in S corporations, but ownership of S-corporation stock by other corporate entities—including most venture capital firms—would terminate the company’s S-corporation status.

That leaves C corporations and LLCs as good initial choices. Companies that begin as an LLC, Kloss and Radke say, can easily switch to a C corporation structure later on if it would facilitate venture or institutional investment, for example.

After deciding what corporate structure to use, company founders must decide where to incorporate. The obvious choices, Radke says, are Delaware and Minnesota. Delaware is a popular incorporation destination, she says, because its corporate law structure is well tested in the courts and understood across the United States, and because it allows decisions to be made with the written consent of shareholders, rather than a physical meeting. To be incorporated in Delaware but based in another state, companies pay a state franchise tax and hire a company to serve as a Delaware registered agent.