Structuring a new business with equity investors

Some Maryland entrepreneurs might want to avoid taking out a loan in order to get their businesses off the ground. Therefore, they seek out and partner with equity investors. Choosing how to structure a new business involving equity investors requires careful consideration.

Equity investors are often what people refer to as the "silent" partners in a business. They own a part of the company, but they are not directly involved in the day-to-day management and operations of it. Fortunately, the entity structure of the business is not restricted to one type or another. Unfortunately, that still means that the pros and cons of each type of entity will need to be weighed.

The "default" structure is a general partnership, but most investors do not want to be a part of this type of entity because it leaves the individuals liable. Some investors are willing to be part of a limited partnership, which means that liability is limited to the general partner. The business owner would be the general partner, while equity partners would not have any liability. Neither of these structures is particularly desirable. 

That is why a large portion of companies are corporations or limited liability companies (LLCs). Individuals enjoy freedom from personal liability under most circumstances. Small companies often lean more toward becoming LLCs because the legal and administrative requirements for corporations can be cumbersome, time-consuming and expensive.

Choosing a structure for a new business involves a plethora of legal and business decisions. When equity investors are added to the mix, it can become more complex at the outset. However, once all of the pieces are in place, the new Maryland business will have the foundation upon which it can thrive.

Source: FindLaw, "Equity Investors & Your Business", Accessed on March 19, 2016

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