Incorporation and Business
Loans
There is a common misconception
that simply having a corporation can absolve you from liability regarding
business loans acquired for your business. This could not be less true. In
today’s lending environment, most banks and finance companies will require a
full personal guarantee before providing you with a business loan or other type
of business credit facility. In fact, most SBA loans (as well as conventional
business loans) require that the small business owner provide a personal
guarantee for any credit undertaken by business that is closely held to the
owner.
As your business continues to
expand with a profitable operating history, the demand among banks for personal
guarantees will lessen. However, this is not always the case. Many established
entrepreneurs that have sought business loans have also come across the issue of
having to put up personal assets (primarily residences) in order to secure
business loans and business lines of credit for their companies. This trend is
expected to continue for sometime as banks and finance companies have tightened
lending standards in the wake of substantial losses incurred due to the poor
housing market over the past three years.
With this in mind, it is
important to select a corporate entity that will assist you in developing the
business credit that you will need in the future for securing a business loan
solely in the name of your business. There are many different forms of business
entities to chose from including corporations (both C and S corporations),
limited partnerships, limited liability companies, and limited liability
partnerships.
Prior to incorporating your
business, you should speak to a duly licensed attorney and a certified public
accountant to determine which corporate structure works best with your personal
financial situation. When looking for business loan, it is important to note
that the corporate structure you chose will most likely flow onto your personal
income statement in regards to tax filing matters. As such, proper advice should
always be sought when making this very important decision.