Most of us work for someone else before we evolve into entrepreneurs. We often gain valuable knowledge, skills and experience about certain aspects of business that help us identify a business opportunity but it rarely exposes us to the legal, financial and funding elements of starting a new small business. These three topics are closely related in establishing a sound business structure and it is worth your time to make sure you develop a basic understanding of how they may play a part in your business success.

Legal Relationship

Legal is generally focused on the legal structure of the business. There are several legal structures available for your business. They include sole proprietor, partnerships, corporations and Limited Liability Companies (LLC). The primary reason to have a corporation or LLC is to protect your personal assets in case you have a liability claim against the business. Because of the more comprehensive financial record keeping required by law (see Financial) it can make it easier to clearly identify the history and value of the business if you decide to sell it in the future.

Financial Relationship

Financial refers to the preparation of various financial records. First is how you keep a record of your income and expenses (book keeping) and the preparation of your formal financial reports including a profit and loss statement (P&L) and a Balance Sheet. They also refer to maintaining other records for such things as your sales tax, income tax and payroll records. If you develop a business plan to seek a loan (see Funding) you will be including a projection of your income and expenses for the next 2 or 3 years and indicating how you will spend the money if you get the loan.

Funding Relationship

Funding refers to the process of obtaining money from either investors that will become owners of the business or getting a commercial loan which is a debt and must be repaid. In either case, the funding source will want to know your legal structure, review your past financial performance including analyzing the financial records noted above, and see a projection of future income and expenses and profit or loss.

There are many more things to learn in order to ensure you are doing everything to protect and enhance the value of your business. Take advantage of SCORE mentors with broad experience in these areas. You also might want to attend the Legal/Financial/Funding workshop on these subjects led by a SCORE Mentor with broad experience as Legal Counsel and Chief Financial Officer.

About the Author(s)

 Richard  Hall

An entrepreneur, author, speaker and SCORE Houston Mentor in  the Woodlands location with 10+ years experience assisting  business startup clients with business and marketing plans, operations efficiency reviews, financial analysis and all small business issues.

Business Mentor, SCORE Houston
Elements of A Start Up: Understanding legal, financial and funding relationships