When starting a small business one of the most important things to start with right from the beginning is organization.
Below are some questions you should first ask yourself to figure out how to organize it:
- What is the source and amount of borrowed money for the business?
- What skills will the business need that I cannot provide?
- How much personal control do I want to maintain over business decisions?
- What form of organization will minimize taxation of the business?
- How much personal responsibility should I take for business debts and liabilities?
- What will happen to the business if I can no longer manage it?
- What organization form will best help me to achieve my short-and long-term business goals?
Now all of these questions will be strongly affected by what type or legal forms you will be using when it comes down to structuring and organizing your business. It also has to be flexible in order to grow with the changes your company will see when going into partnerships or other types of merges or sold shares.
Below are some ideas of the different advantages and disadvantages of how your business should be structured right off the bat:
Sole proprietorship – The sole proprietorship is a business that is owned and operated by one person. It is the simplest and least expensive business structure to form. Many start-up companies choose this form until it becomes profitable to enter into a partnership or corporation. The sole proprietorship form is often useful for a new business because it has a simple structure and is easy to set up. It is the least regulated form of business organization. Its profits are taxed as part of the owner’s individual income. The business owner in a sole proprietorship is responsible for all financing, management decisions and liabilities of the business.
- You are your own boss
- Less government regulation than other forms
- Simple structure
- Ease of formation
- Business losses lower personal tax
- Risk losing business with death or disability
- Total personal liability
- Profits taxed as personal income
- Limited financial resources
- Limited management potential can only expand with “after tax dollars”
General partnership – A written agreement among partners is not required by law, but helps clarify business arrangements and avoid misunderstandings. You may want a lawyer to draw up a written partnership agreement. Any agreement must follow the Maine Code on general partnerships. When signed by all partners, the agreement is an enforceable contract.
- Simple organization
- Shared personal resources
- Shared financial resources
- The right to select partners
- Cost of organization
- Unlimited liability
- Limited decision-making
- Limited life of business
- Sharing of profit
Limited partnership – A limited partnership is a particular form of partnership that gives investors special tax advantages and protection from liability. The limited partnership is like a corporation in many respects. It allows people to invest in the business, but their liability is limited to the amount of their investment or as agreed in the limited partnership agreement.
A summary of the limited partnership agreement, along with the business name, must be filed with the secretary of state’s office, which sends a copy to the county recorder’s office.
- General partner maintains control of business
- Limited partner can invest with limit on liability
- Easy way to secure financial resources
- The business is not directly taxed
- More complex organization
- Limited partner has no control of business
- General partner has general liability for the business
Corporation – A corporation is a separate legal entity from its owners, the shareholders. It can make contracts, it is liable for any obligations, and it pays taxes on earnings. It is a legal “person.”
Many sole proprietors feel they should incorporate to limit their business liability. This certainly is an advantage, but unless the assets of the business are substantial, the officer-shareholder may still have to sign for the business.
- Shared personal resources
- Shared financial resources
- Perpetual life increased management capability
- Easy transfer of business
- Limited personal liability
- Possibility of double taxation
- Complex organization
- More costly operations
- More complicated management
- More government
“S” corporation – Entrepreneurs who decide on a corporate form of business may want to consider “S” corporate status. Besides limiting liability, the tax advantages are a factor to consider for this option. To qualify for a “S” Corporation structure, a corporation must meet all of the five following requirements.
- It must be a domestic (United States) corporation.
- It must have no more than 35 shareholders.
- It must have only one class of stock.
- All shareholders must be individuals, estates or certain trusts.
- None of the shareholders can be non-resident aliens.
There is no best method of determining the right form of business organization for your enterprise. You should think about all factors before you make a decision. If you’re considering starting a business, consult lawyers, tax accountants and other professionals (depending on the nature of the business) for advice.
You should always take as much time as needed to figure in every little thing before making a decision or your business structure. So go ahead and call on all of those little offers you have had over the years for any type of legal advice from your professional friends and business partners. It never hurts to cover everything you possible can before your have to deal with it for real.
What would you suggest to someone trying to organize their new business?