People start businesses for a host of reasons. Some are valid and some are more whimsical. One goal often cited is to take the business public and make big money. To do this, you business needs to be set up correctly.
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.
Most businesses today are formed as either a corporation or a limited liability company. They are the most popular because they shield their owners from personal liability for debts incurred by the company such as an office lease.
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?
There is no perfect business entity and the LLC proved to have its problems as well. The IRS did not like single owner versions of the entity. State fees could be atrocious. Only when people started to try to go public did the huge concern arise.
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.
The rule is simple. If you want to be a publicly traded company, you must have shares that can be traded by the public. It sounds obvious and it is. For LLC owners, however, it is a huge problem.
If you want to take your company public one day, you must choose a corporation as the business entity. Any other choice is going to be problematic.
