S Corporations, partnerships, and sole proprietorships are challenging from a tax perspective because the owners are generally taxed on the paper profit of the business, not the money that they take out of the business. As a result, many business owners want to take the profits out of the business if they are going to be taxed on those profits. However, that can present some challenges in a couple of different ways.
For one, the business may be left with less than necessary working capital that is needed to run and support the business, especially during tighter times. As a result, the business has to typically either:
1) Seek externally financing. This can be tough to do during a time when funds are actually needed, especially if there is little existing capital in the business.
2) For the owner to inject financing in to the business. This is assuming they have not spent or tied up the money that they withdrew from the business.
The other major area that the business owners having little to no equity in the business, comes in to play when seeking external financing. Lenders and investors, want to see that business owners have their own funds tied up in to the business. We currently went through an experience with a client in Wilmington NC where the lack of owner equity in the business was a major hang up in helping them obtain funding. Ultimately, the business owners have to make a commitment to continue an investment in the business rather than as a piggy bank if they want to have the proper working capital and to obtain external funding. Let us know if you have questions or comments about this specific topic.