They start small, with limited equity, and they generally have a high cost associated with actual capital acquired. Businesses with limited equity have limited access to bank debt since equity is required to secure bank debt. As a result, such businesses are often unable to pursue available growth opportunities. Sales growth requires cash resources to finance associated accounts receivable, inventory and fixed asset growth. Sometimes these businesses overcome their initial capital problems, and they become larger entities generating significant annual sales and pretax net income amounts.
Larger entities are typically more concerned with cost of capital than with access to capital.
Often overlooked by small business owners struggling with access to capital and cost of capital issues is the effect legal entity choice has on these items. Legal entity choice has significant payroll tax and income tax implications, which have a direct effect on availability and cost of capital. In addition, we'll explore legal entity choice for larger, closely held businesses. Specifically, this article will address the effect of legal entity choice on payroll taxes and income taxes, which directly affect access to capital and cost of capital. We contend that S corporations and C corporations remain viable entity choices for owners of closely held businesses.