117
Chapter 6
Financing Your Dream
CONGRATULATIONS!! If you have plowed through the previous chapters
and are reading this chapter, you have decided to become an entrepreneur.
Welcome aboard.
6.1 Naming Your Baby
You are now the parent of a new baby and, like all parents, you need to
name your company and the products it will offer. As you will see, this is
no easy task. Large and small companies alike have made embarrassing and
costly mistakes.
Your company name will depend on two factors: (1) how much “gravitas”
your company requires for customer acquisition. Gravitas, in this context, is
the perception of your company’s connectedness, funding, and relevance in
its intended market(s), and (2) whether you are Business to Business (“B2B”)
or Business to Customer (“B2C”). Many B2C businesses depend upon adver-
tising, potential to go “viral,” perception, and social discovery for customer
sales. Carefully consider how you intend to acquire customers, and then
determine the importance of “name equity” in your customer acquisition
strategies.
1
6.1.1 Bad Company Names
An Egyptian airline, Misair, was very unpopular with the French because the
name, when pronounced in French, meant “misery.” The AMF Corporation
118 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
had to change its name because AMF is the ofcial acronym of the
Australian Military Forces. Sew What, Hair Foyer, and Outerware Outhouse
are other examples of poorly chosen company names.
6.1.2 Bad Product Names
The pharmaceutical giant Abbott Labs named its blockbuster anti-arthritis
drug “Humira,” which the company marketing department insists should be
pronounced “hu-MARE-ah”. General Motors had problems in Latin America
when it introduced the Chevrolet “Nova.” Literally translated in Latin, Nova
means a new star, but in Spanish, it sounds like “no va,” meaning, “does not
go.” Yves St. Laurent faced a storm of criticism in China when it named its
new fragrance “Opium,” an illegal drug.
6.2 Incorporating Your New Venture
Once you have selected your company’s name, it is time (in conjunction
with your lawyer) to select the rm’s legal structure. Each structure has spe-
cic advantages and disadvantages, so your circumstances will dictate which
legal structures are available, and which choice might be optimal. Your
choices are shown in Figure6.1.
Before we discuss the relative strengths and disadvantages of different
corporate structures, Table6.1 reviews the legal terminology associated with
each entity type.
Legal structures at-a-glance
One type does not t all
• C Co
rporation
• S Cor
poration
• Limite
d Liability Corporation (LLC)
• Limite
d Partnership (LP)
• G
eneral partnership
• S
ole proprietorship
Increased legal protection
No asset
protection
Figure 6.1 Legal structures—The six possible legal structures available to founders.
Financing Your Dream ◾ 119
6.2.1 Characteristics of Corporations
Although corporate law varies by jurisdiction, the four core characteristics
of the business corporation are: (1) legal personality, that is, perpetual exis-
tence, (2) limited liability, (3) transferable shares, and (4) centralized manage-
ment under a board structure, as depicted in Figure6.2.
6.3 Selecting the Optimal Legal Structure
To provide a frame of reference, Table6.2 presents a simplied corporate
entity comparison to simplify your discussions with attorneys, accountants,
and other stakeholders. Selecting your legal structure is one of the most fun-
damental and critical early decisions.
Table6.1 Legal Terminology of Corporations
Term
C & S
Corporations LLCs LPs & GPs
Owner Shareholder Member General or limited
partner
Executive
management
Board chairman,
CEO, CFO
Managers General or limited
partners
Incorporated in a
state
Articles of
incorporation
Articles of
incorporation
Certicate of
limited or general
partnership
Governance
documents
Bylaws Operating
agreement
LP & GP
agreement
Legal Characteristics of Corporations
Limited Liability
Transferable
Shares
“Personality”
Perpetual Existence
Centralized
Management
Corporations:
1. Domestic
2. Foreign
3. Alien
Figure 6.2 Legal characteristics—The four core characteristics of a business
corporation.
120 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
Corporations are legally treated as articial “persons,” and are classied
into the following categories:
◾ For-prot corporations
− Created to conduct a business for prot
− Able to distribute prots to shareholders in the form of dividends
◾ Not-for-prot corporations
− Formed to operate charitable institutions, colleges, universities, reli-
gious groups, etc.
Table6.2 Simplied Corporate Entity Comparison
C & S
Corporations LLC LP & GP
Sole
Proprietorship
Personal
liability
None None None Unlimited
Legal
obligation
Ofcers and
directors
Any member
Any GP
Any GP Sole
proprietor
Managerial
decisions
BOD
Ofcers
Any member
Any GP
Any GP Sole
proprietor
Ownership
restrictions
Shareholder
vote
Any member
Any GP
Any GP One sole
proprietor
Startup
documentation
Articles led
with state
Annual
meetings
Articles led
with state
Annual
meetings
recommended
No state ling
Annual
meetings
recommended
No state ling
No annual
meetings
required
Interests
transferability
Limited by
securities
laws
Unanimous or
supermajority
consent
Consent of all
partners
Unlimited
Death of owner Corporation
continues
Dissolution in
some states
Automatic
dissolution
Automatic
dissolution
Taxation of
prots
Corporate
tax rates;
dividend
taxes at
individual
rates
Individual tax
rates
Individual tax
rates
Individual tax
rates of sole
proprietor
Financing Your Dream ◾ 121
◾ Public corporations
− Owned by shareholders
− Securities listed and traded on stock exchanges
◾ Private corporations
− Corporations owned by a few people and shares have no public market
− Closely held corporations. Closely held corporations are entities
funded and fully owned by founders as private companies. Since
no “public” shareholders are involved, these organizations are also
called “private.”
◾ Corporations owned by one or only a few shareholders
6.4 Legal Powers of Corporate Executives
Publicly and privately held for-prot corporations confer corporate
titles or business titles on company ofcials as a means of identifying
their functions and responsibilities in the organization. The highest-level
corporate executives are usually called “C-level” or part of the “C-suite,”
referring to 3-letter acronyms starting with “C” and ending with “O” (for
“Chief ... Ofcer”); the traditional ofcers are Chief Executive Ofcer
(CEO), Chief Operations Ofcer (COO), and Chief Financial Ofcer
(CFO).
2
Below are a list of important duties and responsibilities of corporate
executives.
◾ Chief Executive Ofcer (CEO)
− May also be Chairman of the Board
− General scal responsibility and managerial supervision
− Presides at all corporate meetings
− Power to sign all documents
− Reports annually to shareholders
− The “buck stops here”
◾ President
− May also be CEO
− Day-to-day company supervision
− Fixes compensation across entire entity
− Implicit power to perform all acts authorized by the Board of Directors
− Implements all strategic decisions
− P&L (Prot & Loss) responsibilities
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