Getting Your New Corporation Up And Running - Funding
Once you form a new business entity, you need to come up with a way to get money into it. This concept is known as capitalization or funding of the business entity.
At first glance, funding an entity seems fairly simple. Don’t the officers of the corporation simply open a bank account and deposit some money? Unfortunately, it is not that simple. The money has to come from somewhere, typically the shareholders.
Funding a new corporate entity is obviously a critical step, but how is it done. There are three primary methods, although one should check with applicable laws in your state to delineate which are available. Regardless, let’s take a closer look.
The number one way to initially fund a corporate entity is through the sale of shares in exchange for cash. The initial investors are known as shareholders, and for a good reason. These individuals or, in some cases, other businesses, agree to invest a certain amount of money per each share received. These purchases are then recorded in the corporate book
A second method for funding a business is to exchange property for a shareholder position. In this situation, a business will often contribute items such as manufacturing equipment, real estate, intellectual property and so on for shares. The new corporation gains the equitable value of the property, which can be used outright and leveraged for monetary loans to create cash flow.
A third approach to funding is the exchange of shares for services rendered. The objective idea is to obtain critical expertise from a recognized source without having to pay for it! In turn, that person being taken advantage of is betting the business entity will take off and their shares will increase exponentially in value.
When it comes to funding a new corporate entity, particularly one with one or two shareholders, there are other approaches that can be taken as well. For instance, it is not necessary to contribute a large amount of capitalization. Instead, one can look to contribute a nominal amount of cash and then loan the rest of the money to the corporate entity. In doing so, the loan approach creates flexibility in the movement of funds.
When you form a new business entity, it is important to think through the process of how you will generate money within the business structure. Funding sounds simple at first, but care should be taken.
Richard A. Chapo provides California incorporation services via his site at SanDiegoBusinessLawFirm.com
Tags: capitalization, corporation, fund, funding, incorporate, law, legal, sell, shareho, shares