Business Fundamentals
Deciding which business is right for you is the first step any entrepreneur must take. Once you’ve decided on the business that’s best for you, you’ll be faced with three important decisions. These decisions will impact –
- Whether you go it alone or with a partner
- The type of business organization to use
- What professional advisors to select
To help you make the best business decisions, we’ve developed a series of articles that are geared toward guiding you along the right path. The first article in our Building your business series explores business partnerships – should you or shouldn’t you, and the types of organizations that might be the best fit for your business’ needs.
Business Partnerships
Featured Video: Partnerships, LLCs, Corporations – What’s Best for Your Business
Do you need a Business Partner?
When thinking about business partnerships, it’s best to make a list of the pros and cons, this way you can see it all mapped out before you and can make a more informed decision. Here’s our list to get you started –
Saying Yes to a Partner
- There is safety in numbers. In other words, you have two heads instead of one to discuss and make decisions.
- You will not need to be at the business at all times. You will have someone else who will be there to share the load and permit you to take some personal time.
- You will also have a highly motivated co-worker, not just someone who is earning a pay-check.
- Partners can also be advantageous when they have complementary skills.
- It may be necessary to have a partner to contribute capital and share the risk when things do not proceed as planned.
If you’re thinking about going into business with a partner, remember that a partnership should have provisions made for exit strategies. You may need experts experienced in succession planning to advise you. What happens if a partner dies or becomes disabled? Or if family members want to join or quit the firm?
Going it alone!
- You will have to share the rewards if the business is successful.
- You will lose total control over the business, particularly if you and your partner have difficulty in making decisions.
- Some partners are not as experienced in running a business, so the support you might have anticipated would not be forthcoming.
- A partner can be a disaster if his or her judgment is not good. This means your reputation will be equally on the line.
- You run the risk of a falling out and perhaps the necessity of one partner being required to buy the other out if dissension arises.
Some of the things to consider in deciding whether a person will make a good partner are whether you have similar work habits, similar objectives concerning how to run the business and whether your strong points are similar or complementary. For example, different capabilities permit you to spread the workload and provide better coverage for problems.
Different capabilities may permit you to give each partner a veto over important decisions in his or her area of expertise to help maintain stability and eliminate conflicts. Finally, you may want to consider whether you should have a buy-sell agreement in the event of a disagreement, and how the purchaser will pay for the portion of the business he or she is buying (and whether you should fund the buy-sell agreement with insurance in the event of the death of a partner).
The Type of Business Organization that’s Best for You
Whether you are going it alone or with another person, it is best to consult a lawyer to determine which form of business organization will be best for you. Your choices and the benefits of each form are essentially as follows:
- Sole Proprietorship:A sole proprietorship is one person alone. He or she will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on his or her personal income tax return along with all other income and expense he or she normally reports (although it will be on a separate schedule). Although proprietorship avoids the expense of forming a partnership or corporation, many start businesses this way because they are unfamiliar with the other forms of organizations.
- General Partnership:In a general partnership, each of the two or more partners will have unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his or her pro-rata share of the profit or loss from the business as one line on his personal tax return.
- Limited Partnership:With a limited partnership, each of the general partners has unlimited liability for the debts of the partnership, but the limited partner’s exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.
- Corporation/ Limited Company:A corporation provides limited liability for the investors. Except as indicated below, none of the shareholders in a corporation is obligated for the debts of the corporation; creditors can look only to the corporation’s assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends, it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings. A corporation has some tax benefits such as deductibility of health insurance premiums.
There are variations in these rules, and you should consult with your attorney and/or accountant in each specific case to determine what form of organization best fits your needs.
One of the things to consider in making the final decision is, although a corporation has limited liability for its shareholders if the corporation does not have enough assets various creditors may insist on personal guarantees from the shareholders. Examples are your landlord, some suppliers, and by law, liability for certain payroll taxes and liabilities to employees.
