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LLC vc S corp?


Austontatious

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My current business plan involves raising capital with investors. I'm looking at trying to raise $100k or less for a total of 33% interest in my distillery. I want to maintain control, I basically want my investors to leave me alone and cash their checks. I would also like to be able to allocate dividends as I see fit for the future of the business, instead of just handing out a percentage of my net. I am leaning towards an S corporation filing. Does anyone have any advice either for or against that?

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I'd recommend you talk with your lawyer and accountant. There are several pros and cons for each type of corporate structure - related to much more than just control and dividends (think taxes, liabilities, governance, etc.). Some can be addressed by a solid set of By Laws regardless of structure, but you'll want to explore all of the "what ifs" regarding how you plan to raise capital via equity and/or loans (both now and in the future) and how you plan to operate and provide an ROI that your investors want.

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"I want to maintain control, I basically want my investors to leave me alone and cash their checks. I would also like to be able to allocate dividends as I see fit for the future of the business, instead of just handing out a percentage of my net."

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I would not expect to get much money from investors with that frame of mind. Telling people to, "give me your money, then don't bother me" generally leads to a poor outcome.

He who has the gold gets to write the rules.

There will come a time with your startup when you will likely need to expand and need fresh capital.

If you treat your existing investors like a mushroom then word tends to get around and other investors will avoid you.

Also, odds are very high that there won't be any investor checks to cash for the first few years of the business.

It is far more likely that you will be going back trying to raise more money for all of the costs that were 30% more than you expected.

Even if you are successful right away, you will likely need to raise more money to fund expansion because even a successful cash flow likely won't be enough to buy new equipment.

Treat your investors well, otherwise I predict failure.

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I spoke overly harshly, but what I meant was that I don't want to be managed by stockholders. I meant that I don't want to be locked into a structure where I have a board of directors who may or may not know the first thing about making whiskey, that I am constantly doing political maneuvering with just to get anything accomplished. My business is small. Like not quitting my day job small. I would have kept a sole proprietorship were it not for the costs associated with the physical space, everything else I'm prepared to come out of pocket for.

So yes, I absolutely get your meaning, and I didn't mean it to sound like I viewed potential investors as impediments to success.

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Perhaps the best bet for that small of an amount, may be the "friends and family" route. The difference between an "LLC v. S, will not really dictate the terms of your investor relations. That will be strictly determined by the investment documents, and associated rules you and your investors agree upon. The LLC v. S, is more of a tax and liability issue than an investment vehicle.

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"My business is small. Like not quitting my day job small. I would have kept a sole proprietorship were it not for the costs associated with the physical space, everything else I'm prepared to come out of pocket for. "

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I agree with Roger. That sounds like a "friends and family" type of business. They will be more forgiving about staying small, lack of growth, etc.

Outside investors will want to see a formal business plan. Part of that plan needs to show a section called, "Exit Options".

Your investors are going to want to know how they cash out in 3 to 5 years. They are not investing in your business just to help you have a hobby side business. Investors typically want to see a plan to get to a buyout by another company or some other process for them to cash in after a few years.

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I'll chime in and agree with the posts above. IMHO I would avoid investors unless they have some expertise to add to the business or you can't get funding any other way. They generally have higher expectations and are more demanding about good return. If you have decent credit you should be able to secure a loan from a bank and money is still very cheap. The bank also won't tell you how to run your business.

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Most businesses that have more than one owner use an LLC. It will define your relationship on who does what and gets what. If you are the owner a S Corp. is a the way to go. You don't have to have meetings and keep records of the meetings. If you have people that have a say so in the business or not and are silent partners that you as CEO has to answer to and have meetings that keep records then a Corp. might be your way to go. Realistically your accountant might be better than me or business owners because there are tax advantages that the accountant might give you because you can tell him exactly what your plans and where your money is coming from and where it might go. In my honest opinion if you can swing it on your own by starting out smaller and growing your business as you can is what I recommend. When the bottom fell out of the banking industry things changed and banks got really picky about who they lend to. When you are self employed they tend to have red flags all over the place. Try to stay with your home town bank that keep loans in house and hopefully you know someone at the bank. I will not borrow money from friends and family because I have to set across from them at holidays and if things turn out good they expect more or bad they expect not to loose cause who they are.

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One thing I would throw in there is the simplicity of TTB and Bonds with an S corp rather than an LLC. We are just completing this process, as an LLC with a number of investors. As an LLC we had to report an extensive amount of financial background on EACH investor, for both the TTB and securing the Bonds. Even on the state level it has caused some difficulty as a couple of the investors had ownership in alcohol related businesses, which is not allowed in our state without a legal exemption.

An S-corp would have made that process much simpler.

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One thing I would throw in there is the simplicity of TTB and Bonds with an S corp rather than an LLC. We are just completing this process, as an LLC with a number of investors. As an LLC we had to report an extensive amount of financial background on EACH investor, for both the TTB and securing the Bonds. Even on the state level it has caused some difficulty as a couple of the investors had ownership in alcohol related businesses, which is not allowed in our state without a legal exemption.

An S-corp would have made that process much simpler.

What makes that difference is the number of owners, not that it is S-corp per se. You can be a sole owner LLC, and it is no more complicated than an S-corp. It is a harder question to say whether a sole owner LLC or an S-corp is better for a sole owner. That is more a matter of how you want to handle your taxes, so talk with your accountant.

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