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Getting business funding for your startup might seem impossible if you’re just getting started with the process. You might think there are 25 hoops to jump through and a tightrope to try not to fall off of as you also juggle six bowling pins and balance a cinderblock on your head.
But luckily, it’s not all that hard to do.
All you need to do is follow these five easy steps.
1. Get an EIN Number
Before you can get business funding, people need to know that your business is recognized by the IRS. Otherwise, it’s going to be pretty hard to get funding of any kind. So the first step to getting business funding is to get an EIN number through the IRS website.
Then, you’ll want to make your business legal in the eyes of the state and federal government.
2. Form a Legal Business
Decide what type of legal structure you want for your business.
- Sole Proprietorships – Made up of one person — the person who owns an unincorporated business by his or herself. A lot of new business owners start out as sole proprietors because it doesn’t require you to fill anything out with the state or federal government. And since sole proprietors aren’t treated as taxable entities, they can legally file a personal income tax form with a Schedule C when tax time comes around.
- Partnerships – Each person in a partnership is equally liable in the event that your company gets sued. Some consider partnerships to be the most flexible type of business structure for companies owned by more than one person. When it comes to filing taxes, each person that’s part of the partnership has to file Form 1065 with their personal tax returns.
- Corporations – Legal entities in the eyes of the law, which means they can bring lawsuits, be taxed, buy and sell property, and commit crimes. A corporation, like an LLC, protects its owners from any personal liability when it comes to obligations and corporate debts (but to an extent). A corporation is owned by shareholders and managed by a board of directors and the shareholders are responsible for electing the directors (and they appoint the corporate officers).
- S Corporations – Separate legal entities with fewer than 100 shareholders. S Corporations function like partnerships but offer owners more legal protection (however, your liability is still limited). Incorporating an S Corporation is pretty tedious. With an S Corp, you’ll get pass-through taxation, which means you and the other owners have to report each of your shares of the profit and loss on your individual tax returns. While S Corps provide investment opportunities and only have to file taxes once a year, if you accidentally miss certain filing requirements, your S Corp status can be terminated.
- C Corporations – Formed and regulated on a state level and to form one, you’ll have to file an “Articles of Incorporation” with the Secretary of State. You should consider a C Corp if you want to be attractive to potential investors, you plan on having a larger business, or you want to publicly trade shares eventually. Most major businesses in America are structured as C Corporations. A C Corporation comes with limited liability, enhanced corporate credibility, and fluid ownership (can be a single owner or multiple owners). With a C Corporation, it’s easier to raise money through an IPO. However, forming a C Corp means double taxation for investors and extensive legal requirements.
- Limited Liability Companies (LLCs) – A cross between a partnership and a corporation, an LLC gives you the most protection if you ever get sued. If that happens, no one can come after your personal assets. In general, the IRS usually treats LLCs like sole proprietorships or partnerships, unless the LLC owner asks to be taxed like a corporation. Reporting requirements for LLCs are a bit laxer than they are for a corporation.
Then, start the process of forming whatever type of legal structure for your business you decided on. You can take the lawyer route or use a service like Incfile.
3. Get a Business Bank Account
The next step in the process is to get a business bank account. But aim for mid-sized banks that might be able to help you out with funding sometime down the line.
Banks like PNC and Suntrust are good banks to start with when you’re a startup.
I made the mistake of opening my first business bank account with Chase, a major bank that’s not likely to lend to small businesses. I’m in the process of looking for a medium-sized bank to switch to.
4. Start Building Business Credit
Building business credit – contrary to popular belief – isn’t as hard as it might seem. In fact, it’s actually somewhat easier to build than personal credit.
To build business credit, start by opening a few trade lines with companies like Quill and U-line. Try to get Net 30 terms with these kinds of companies.
Net 30 terms just means they’ll send you what you ordered and you have to pay for the order in full within 30 days.
You may have to place an initial order with them and pay for the first time. But I was able to get Net 30 terms right away with U-line.
Repeat this process five to seven times and then you can move onto the next tier of building business credit, which is alternative lenders and then traditional lenders.
5. Determine What Kind of Funding You Need and How Much
Once you’ve started to establish business credit, you’ll have access to a lot more money via credit and loans.
Remember to borrow responsibly. Never take out more money than you can afford to pay back or you could end up in a situation that you can’t get out of and you could risk losing your business.
So determine how much money you think you’ll need to start or grow your business and keep it at that.
Go Get Yo’ Funding
Now that you know how to get business funding, start the process by getting an EIN number and following the rest of the steps outlined above. Always use business credit responsibly – otherwise, you’ll hurt your chances of getting funding in the future.
What routes have you taken to get business credit? Let us know in the comments.