Business-Minded Legal Solutions

Legal aspects of business financing

Starting and running a business often requires money from various sources, such as banks, private equity, venture capital or angel investors, friends and family, or possibly even crowdfunding campaigns.

Understanding the legal aspects of business financing is important for any entrepreneur. It ensures that the business complies with laws and avoids legal troubles.

Debt versus equity financing

One key legal aspect is choosing the right type of financing. Businesses can opt for debt financing or equity financing or, more often, a combination. Debt financing involves borrowing money that you need to repay with interest. The business should understand the terms of the loan, including interest rates and repayment schedules, guaranty obligations and pledged collateral. Lenders often impose financial and operating covenants that restrict what the business can do. Businesses will experience penalties and damaged credit, may lose collateral, and put guarantors at risk if they breach their covenants or fail to repay their loans on time.

Equity financing involves selling a part of the business to investors in exchange for capital. This dilutes the ownership of the founders and often entails giving the investor rights such as voting rights and information rights. With equity financing, investors gain partial ownership of the company. State and federal securities laws apply to the issuance of equity and there may be required financial and other disclosures.


Crowdfunding platforms allow businesses to raise small amounts of money from a large number of people. However, businesses need to follow applicable securities laws as well as specific rules set by these platforms. Managing a business that has a long list of small investors can be time-consuming and complex.

Tax considerations

Tax considerations also play a significant role in business financing. Different types of financing have different tax consequences. For instance, interest payments on debt financing are often tax-deductible by the business, whereas dividends paid to owners are not. Businesses should keep accurate financial records and understand their tax obligations to avoid legal issues with tax authorities.

Financing agreements

Financing contracts outline the terms and conditions of the financing, including the funds’ uses, repayment terms and default parameters. Clear contracts help prevent misunderstandings and disputes between the business and its financiers.

As they make their financing decisions, entrepreneurs should investigate each option to determine what will work best for their companies.