Understanding Business Entity Choices If You Want To Go Public
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.
What are we referring to when discussing business entities? There are various forms you can hold a business in such as partnerships, limited partnerships, limited liability companies and corporations. Only one of these entities, however, can be taken public.
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.
This, of course, resulted in all the other states passing similar laws, right? Actually, no. It was not until roughly ten years later when the IRS said LLCs could be taxed as partnerships that other states started paying attention.
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.
The primary problem with taking an LLC public has to do with how ownership is held. The owners have a percentage interest in the company. To go public, a business must have shares of ownership that can be traded. The LLC has none.
As you have probably noticed, all large publicly traded companies have shares. The prices of these shares are discussed ad nauseum in the media. These shares are a necessity if a company is to be owned by the public.
Starting a business and taking it public is the great American dream. Pull it off and you will make many millions of dollars. The key is just to make sure you start by incorporating your business instead of using a limited liability company.
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