When you start a business, you need a plan. Part of the plan should be your exit strategy. For many people, the ideal exit plan is to take the company public and hire professional executives to run it. To do this, you must pick the correct business entity when starting the business.

Choosing a business entity first requires that you know what they are. There are many types, but the most popular are corporations, limited liability companies and partnerships. Of all the business entities available, only one can go public.

The corporation and limited liability company are by far the most popular entity choices these days. Why? Each can be used to shield the owners from problems arising from the functioning of the business. If the business gets sued, the owners do no lose their homes.

The first LLC was created by politicians in Wyoming. In the last 1970s, they were looking for a way to raise tax revenues. Their answer was to come up with an entity that provided the protection of a corporation, but without the paperwork. The LLC was born.

The limited liability company did not expand much beyond Wyoming until the late 1980s when the IRS issued an amazing regulation. Essentially, the IRS said a limited liability company could be taxed like a partnership, a huge advantage over being taxed as a corporation.

Suddenly, the LLC looked like a super business entity. States rushed to create laws allowing for their formation. Business entity lawyers rejoiced in a golden age and small businesses actually had a business entity that worked.

Of course, the limited liability company has many warts. They range from excessive state fees to federal tax issues if there is only one owner of the entity. For people who are looking to take a business public, however, they have one huge problem.

Sometimes it is the simple things that create a mess. To be publicly traded, a company must have shares that can be traded back and forth. The LLC has none. It only has ownership interest expressed as percentages.

As you have probably noticed, all large publicly traded companies have shares. The prices of these shares are discussed ad nauseum in the media. These shares are a necessity if a company is to be owned by the public.

Starting a business and taking it public is the great American dream. Pull it off and you will make many millions of dollars. The key is just to make sure you start by incorporating your business instead of using a limited liability company.

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