DC Doing Business Guide

Step 4: Financing Your Business

A. Organize Your Finances

  • Complete a comprehensive review of your business’ financial position and goals. Collect information about your assets and liabilities, as well as your current resources.
  • Review your business plan to make sure your projections support your goals and are realistic. Show how you will exponentially grow your company and support your plan to minimize the risks, and demonstrate clearly how you plan to pay your investors back, with a profit.
  • Visit brc.dc.gov for more information.

B. Determine Your Current Resources

  • Take inventory of the various resources that you may already have available, including personal savings, credit cards, loans from family members and friends, customers and strategic partners, retirement accounts, and trade agreements with vendors or suppliers.
  • Visit bit.ly/bizfinresources for more information.

C. Obtain Your Credit Report

  • Regardless of whether you are going to rely on your current resources or obtain commercial financing, you will need to obtain a copy of your credit report to ensure its accuracy and show potential investors that you are serious about paying back their investments.
  • Equifax, Experian, and TransUnion are the three major credit bureaus. Each credit bureau has a process by which you can request and obtain a copy of your credit report. Request copies of your credit report from the three major bureaus, and clear up any inaccuracies.

D. Find Additional Financing

Identify which funding options might be most appropriate for your business:

  • Obtaining a traditional bank loan
  • Working with a lender to get a loan guarantee from the U.S. Small Business Administration
  • Securing funds from an angel investor, venture capital firm or small business investment company
  • Obtaining a loan from an alternative, community lender
  • Crowdfunding
  • Claiming incentives provided by the DC government (See Ch. 5: Financial Incentives)

Ownership Structures

The ownership structure will not only define who owns the business, but will also determine who controls it, who assumes liability, how profits are divided, and how your business will be taxed.

There are many ways to set up a business, and each business is subject to a unique tax situation. You should consult with a qualified tax professional and a lawyer to determine the appropriate structure for your business. Visit bit.ly/dcbizstructure or business.dc.gov for more information.

C (General) Corporation

A business formed by law as a separate legal entity from its owners (stockholders and shareholders)

Advantages

  • Has a lifespan independent from its owners (stockholders)
  • Fringe benefits costs are tax-deductible
  • Personal assets are protected from business liability
  • Ownership can be transferred through the sale of stock
  • Easy to raise operating capital through the sale of stock
  • Ownership can change without affecting daily management

Disadvantages

  • Incorporating involves considerable start-up expenses
  • Subject to more district and federal legislation
  • Corporate earnings subject to double taxation
  • Many legal formalities exist when filing corporate status
  • Activities are limited

S Corporation

A business similar to a General Corporation, with the exception of specific IRS requirements

Advantages

  • Already exists as a corporation
  • Corporate earnings avoid double-taxation

Disadvantages

  • Difficult to qualify for IRS requirements

Limited Liability Partnership (LLP)

A business in which partners are given the same limited liability protection as professional corporations

Advantages

  • Tax advantage of flow-through tax treatment for LLP partners
  • Simple for an existing partnership to become an LLP

Disadvantages

  • A sole owner cannot set up an LLP as a partnership; an LLP must have at least two partners to exist

General Partnership

A business owned by two or more persons who have agreed—verbally or in a formal written statement—to operate a business

Advantages

  • Easy to establish
  • Partners share workload and responsibilities
  • Financing is easier to obtain than for a sole proprietorship
  • The partners share all profits and reap all benefits of ownership

Disadvantages

  • May be more expensive to start
  • Partners have unlimited liability for business expenses
  • Each partner is bound by the actions of the other partner
  • Decision-making authority is divided
  • Loss of one partner may dissolve the business
  • Partnership may be difficult to end

Limited Partnership

A business similar to a General Partnership, however, one invests assets into the business at their own risk and is limited to the amount of capital invested. The investor is not involved in management and does not share in the liability for debts or losses

Advantages

  • Relatively easy to establish
  • Partners share in start-up expenses
  • Financing is easier to obtain than for a sole proprietorship
  • Partners share all profits and reap all benefits of ownership
  • Partners’ assets are not at risk from creditors

Disadvantages

  • More expensive to set up initially due to the requirement for a written agreement
  • Operating (general) partner has unlimited liability for expenses
  • Loss of one partner may dissolve the business
  • Partnership may be difficult to end

Solo Proprietorship

A business that is owned by a single individual

Advantages

  • Easiest and least expensive to set up
  • Full control over all business decisions
  • Minimal legal restrictions or requirements
  • Owns all profits and reaps all benefits
  • Not required to pay unemployment taxes

Disadvantages

  • Personally liable for all business transactions
  • May have difficulty obtaining long-term financing
  • No unemployment benefits if the business fails
  • Limited tax savings

Limited Liability Company (LLC)

A hybrid business that draws advantageous characteristics from both corporations and partnerships

Advantages

  • Profits and losses pass through the company to its owners for tax purposes
  • Personal assets are protected from business liability
  • No limitation on the number or nature of owners
  • Easier to operate than a corporation
  • Not subject to corporate formalities
  • Owners may participate in management of the business

Disadvantages

  • Legal assistance is needed to properly set up and structure
  • Professionals—such as lawyers, accountants, and doctors—are prohibited from registering as an LLC

Nonprofit

An organization that has no owners, gives no income (except salaries/expenses) to members, directors or officers, and must have a Board of Directors

Advantages

  • Tax exemption
  • Business operation flexibility

Disadvantages

  • Merger limitations

Benefit Corporation (B Corps)

A type of for-profit company that operates as a General Corporation, but adheres to third-party social and environmental benefit standards

Advantages

  • Implementation of best environmental and social policies to your business
  • Indicates real promotion of real social change to your costumers
  • Conduit between investors and businesses
  • Free Global Impact investment rating
  • Flexibility in fundraising and profit structure

Disadvantages

  • Recently introduced so more assistance is needed for set-up compared to other structure

Cooperative Association

(General Cooperative Association or Limited Cooperative Association)

A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.

Advantages

  • Less Taxation
  • Funding Opportunities
  • Reduce Costs and Improve Products and Services
  • Perpetual Existence
  • Democratic Organization

Disadvantages

  • Obtaining Capital through Investors
  • Lack of Membership and Participation