MONEY, FREE FOR THE ASKING
by Eva Rosenberg, EA
Copyright (c) Eva Rosenberg, August 2, 1997
First Publication: Tripod.com http://www.tripod.com/money/taxbytes/
I've watched people struggle through the
quicksand of trying to raise funds via promises from venture capitalists,
run the hurdles of SBA loan applications, produce mounds of paperwork for
bankers, all of whom ultimately turn them down.
These processes teach some people an enormous
amount about their own business and industries by forcing them to create
detailed business plans. Others gain nothing but bitterness and foul tempers.
However, many of the those who develop thorough plans, go on to great success,
despite the financial obstacles placed in their paths.
Quick and Easy
What's if you don't want to waste your
time with all that nonsense? Is there a shortcut that can provide you with
risk-free money? Money that you don't necessarily have to pay back? Tax-free
money to use 100% to grow your business? Money that could make you substantial
profits? If there is, then let me at it!!!!
The source is called "INVESTORS." I know.
You think it's complicated and risky and how do you go about gaining their
confidence and what's if they lose all their money, you'll feel so guilty
and responsible, you'll never sleep again...
OK, so let's re-phrase that - "SMALL INVESTORS."
No more than $1,000 - $2,500 per person. You'd be surprised how many people
would be willing to part with a such small sum for the opportunity to make
2,3,10 times that much money. And with a sum that small, if you fail, no
one person has lost so much that it hurts.
Step right up! Everyone's a winner!
If you already have a small business, you
have satisfied customers, clients, patients, etc. If you approach each
person face-to-face, many people will be pleased to pop for this small
sum. In addition,
At the Starting Gate
$$ It gives them a vested interest in your
success ~You succeed - they profit.
$$ You will be their vendor of choice for
your product or service.
$$ They will be more eager to send you referrals.
$$ They will be more eager to open doors to
better, less expensive suppliers.
$$ They will spend more money with you at
each visit or opportunity - because they are investing in themselves!
If you are just planning to start a new
business, then you'd darn well better know who your customer base is going
to be. (Do your marketing research. That business plan isn't such a bad
idea, either.) Otherwise any money you do raise will be run out surprisingly
quickly - before you make your first sale.
Once you've targeted your market and suppliers,
go talk to them about investing.
Your main problem will be that several
people will offer you more than the small $1,000 - $,2500 investment. Why
is that a problem? Because, as long as the investment is insignificant
you have these advantages (not necessarily in this order):
What's The Payout?
$$ No individual owns enough of your company
to tell you how to run it.
$$ No one person loses enough money should
you fail to hate you for it.
$$ It takes too many people to band together
to oust you from your own company.
$$ The more people who invest, the more additional
business you can generate.
$$ You don't have to sell enough to lose a
$$ With such a small investment, you can give
each person a very small Portion of your business
How much you raise depends on the form
of your business. You can raise a few thousand dollars to a quarter of
a million dollars ($250,000) or more, with as few as 100 investors! (I'll
just bet you know 50 or 100 people you can convince to part with a few
measly bucks.) Convincing 50 - 100 people to participate should take you
less than two months.
Needless to say, (but I will anyway) sit
down with an "Investment Team" consisting of a skilled tax professional,
a business attorney and a business insurance broker to plan out the optimum
business format at the lowest cost and risk.
$$ If you create an S-Corporation, depending
on the state you're in (California is still limited to 35 shareholders),
you may get 35-75 shareholders without any complicated SEC filings. That
translates to $35,000 - $187,500!
$$ If you form a General Partnership (GP),
which is the easiest and cheapest business entity, you have unlimited partners.
The main problem with a GP is that all the partners are responsible for
all the business's debts, errors, lawsuits, etc. So, this is not a wise
$$ However, a Limited Partnership (LP) has
all the benefits of a partnership's simplicity, but limits the investors'
liability to the amount of their investments. This was a very popular format
for the popular "Tax Shelters" of the 1980's. As before, check with an
attorney about the limitation on the number of partners in your state.
$$ Another popular new vehicle is the Limited
Liability Corporation (LLC). The main danger with LLCs is that if your
business crosses state lines (or operates on the Internet, which crosses
international boundaries) you may not have limited liability if you do
not comply with the specific laws of each state, country, principality
sheikdom or other national entity. For example, in California, LLC's are
quite a nuisance to set up an operate. California even charges a tax on
the Gross Income of the company. That means, even if the company
lost $50,000.00 it might have to pay the benevolent State of California
$1,300 if its sales were as little as $250,000.00.
If each investor gets stock, you can give
them each one share per dollar ($1 par value) You can raise $250,000.00
by selling 250,000 shares of stock. Sounds like a lot? Not if you issued
1,000,000 shares! You will still own 75% of the company. (Or you can issue
one share per $1,000.00. Then you sell only 250 shares, but issue 1,000
shares to achieve the same ratio - depending on state's/SEC laws.)
This is such a simple way to raise money.
It just takes some guts and little Chutzpah. But, if you can't sell the
people you know on your own business, how can you ever expect to have sold
the SBA, the banks or venture capitalists? Nu, so what's stopping you from
raising all the money you need?
Worried about tax consequences?
No matter what business form you create,
all the money you receive will be capital or equity. You pay no taxes on
those funds. You can transfer a sole proprietorship's assets to most of
those entities without creating any tax consequences. However, if you transfer
assets (equipment, cars, buildings) with loans against them into the new
business, you might face cancellation of indebtedness income. So just use
your new-found money to pay off the loans before transferring them.
Another little tax benefit, even though
your profits may increase, you'll be able to share the tax burdens with
your new partners. Just be kind and distribute enough draws, dividends,
or repayment of capital so they can pay their share of your business's
Keeping My Promise$$$
At the beginning of this article I promised
you three things:
Just a bit of legalese
$$ Risk-Free Money - small investors understand
that they can only lose small. Nobody gets too upset over small change.
DO NOT approach anyone to whom $1,000.00 - $2,500.00 is a significant sum!
$$ Money you don't have to pay back - funds
used to purchase stock or shares of partnerships are not loans. They don't
have to be paid back if the company shuts down. However, if you make a
profit, you will share it with your investors in proportion to their ownership
of the company. (If you can double your profits, I am sure that you would
not object to giving away 25% of your windfall to the people who made it
possible. You would still be at least 50% ahead.)
$$ Tax-Free - we just talked up about that
up above. All the money is capital. So you can use all of it for the growth
of your business. The legal and accounting costs are minor in comparison
to the cash flow you receive.
First of all, remember, this is a just
an outline of an idea. Not all the tax and legal benefits and pitfalls
can be covered in such a brief column (in fact, it's already too long).
So, seriously, get some good professional advice specific to your business.
Raising money from private individuals
with whom you are personally acquainted or doing business is called a private
exempted offering. There are rules to follow to make sure you don't fall
afoul of the SEC and the U.S. Securities Acts.
Before you even talk to potential investors
read the information provided at the following sites. Then, you'll have
an inkling of what questions to ask your Investment Team before you go
For sources of U.S. government funds and other
resources, you might want to read the new 4th edition of : Free Help From
Uncle Sam to START YOUR OWN BUSINESS or Expand the One You Have By William
Alarid Contact: Puma Publishing Company 800-255-5730 or http://pma-online.org/list/2083.html
- Puma Publishing
Private Offering Overview http://www.eifn.com/privover.htm
Private Securities Offerings on the Internet
by Michael D. Stovsky http://www.cyberlaw.com/privoff.html
Excerpts from GOING PUBLIC 101 A Guide for
the Perplexed, by Jack Ben Ezra http://www.benez.com/capscape/101.cfml
It contains excellent resources and contact
phone numbers for money, bidding opportunities, licensing, trademarks,
data sources and international trade. I am still plowing my way through
the wealth of data it contains.
1. SEC = Securities and Exchange Commission.
They have stringent rules about public offerings and publicly traded investments.
(Eva Rosenberg, MBA is an Enrolled
Agent in Encino, California. A frequent guest on radio and television talk
shows, she is also a sought-after speaker on tax and small business issues.
Her practice focuses on small business, non-filers and problem tax audits.
Please submit questions to email@example.com. If you have questions
about commerce on the Internet, Eva moderates the I-Sales Help Desk. For
a free subscription, send a message to: firstname.lastname@example.org
with the word - subscribe - in the body of your message).
2. Within reason. At some point, you start
facing SEC issues again - speak to an attorney for details.
3. Tax Shelters - They have a bad reputation
primarily because so many promoters used them simply to create fraudulent
tax reductions. Many of the ventures never had a profit motive. The investors
not only lost all their investments, but faced severe tax penalties, which
often cost them two or three times their original investments.
4. California's Franchise Tax Board charges
a minimum $800 for all LLC's, LP's, Corporations, etc. Only general partnerships
and sole proprietorships don't pay. So, LLC's will pay the $800 + $500
gross receipts tax on $250,000 = $1,300.00.
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