Do You Have The Right Business Entity for Going Public?
By Aazdak Alisimo | March 20th, 2009The Great American Dream is to own a house. In the world of business, the dream is slightly different. It is to start your own business and then take it public. If this sounds like a good idea, you need to start the business off right.
First things first. A business entity is the structure of the company. It can be a shell entity such as a corporation and limited liability company or something more direct such as a partnership. If you want to go public one day, only one choice will work.
Of these business entities, the two most popular are clearly limited liability companies and corporations. There are a number of reasons for this, but a primary one has to do with the fact they shield their owners from personal liability for company debts.
Many people think the LLC has been around for a long time. It has not. The first one was formed in the late 1970s in Wyoming. The state passed law giving rise to it to boost tax revenues and help out small businesses.
The limited liability company did not expand much beyond Wyoming until the late 1980s when the IRS issued an amazing regulation. Essentially, the IRS said a limited liability company could be taxed like a partnership, a huge advantage over being taxed as a corporation.
Once the IRS ruling hit the streets, every state in the Union took notice. They began passing legislation allowing for the creation of the LLC. The government had come up with a business entity that actually helped small businesses. Shocking, eh?
This mad rush eventually resulted in some problems. People began to realize the LLC was not all it was cracked up to be. State fees could be high. One of the biggest was discovered when people tried to take their limited liability companies public.
A limited liability company is truly designed for small business situations. It is not and was never intended to be used for large entities. As a result, the owners of an LLC have percentage interests in the company. They do not own shares because there are no shares.
To take a company public, the ownership must be held in shares. Otherwise, how can the ownership be bought and sold on an exchange? This is why you see all large, publicly traded entities with shares and dividends based on shares.
Taking a company public is a way to make millions of dollars. If you have visions of doing this one day, make sure to get off on the right foot. Choose a corporation as your business entity.
Tags: business entity, corporation, Entrepreneurs, exit strategy, law, llc
