Before entrepreneurs found a business and perhaps again as it expands they must choose an appropriate legal structure for the company. The three basic choices are proprietorship, partnership or corporation.
A sole proprietorship is defined as an unincorporated business owned by an individual from profit. Proprietorships make up to 70 per cent of all businesses in the United States. This form is popular because it is easy to start and has few legal requirements. A proprietor has total ownership and control of the company and can make all decisions without consulting anyone. However, this type of organization also has its drawbacks. The owner has unlimited liability for the business meaning that if someone sues, the owner’s personal as well as business assets are at risk. Also, financing can be harder to obtain because business success rests on one person’s shoulders.
A partnership is an unincorporated business owned by two or more people. Partnerships like proprietorships are relatively easy to start. Two friends may reach an agreement to start a graphic arts company. To avoid misunderstandings and to make sure the business is well planned it is wise to draw up and sign a formal partnership agreement with the help of an attorney. The agreement specifies how partners are to share responsibility and resources and how they will contribute their expertise. The disadvantages of partnerships are the unlimited liability of the partners and the disagreements that almost always occur among strong minded people. A poll by Inc. magazine illustrated the volatility of partnerships. Fifty nine per cent of respondents considered partnerships a bad business move, citing reasons such as partner problems and conflicts. Partnerships often dissolve within five years. Respondents who liked partnerships pointed to the quality of partners (sharing of workload and emotional and financial burdens) as the key to successful partnerships.
A corporation is an artificial entity created by the state and existing apart from its owners. As a separate legal entity, the corporation is liable for its actions and must pay taxes on its income. Unlike other forms of ownership the corporation has a legal life of its own; it continues to exist regardless of whether the owners live or die. And the corporation not the owners are sued in the case of liability. Thus, continuity and limits on owner’s liability are two principal advantages of forming a corporation. For example, a physician can from a corporation so that liability for malpractices will not affect his or her personal assets. The major disadvantages of the corporation is that it is expensive and complex to do the paper work required to incorporate the business and to keep the records required by law. When proprietorships and partnerships raise funds through the sale of stock to investors.
A crucial concern for entrepreneurs is the financing of the business. An investment usually is required to acquire labor and raw materials and perhaps a building and equipment. The financing decisions initially involves two options whether to obtain loans that must be repaid (debt financing) or whether to share ownership (equity financing). A survey of successful growth businesses asked how much money was needed to launch the company. Approximately one third were started on less than $10,000, one third needed from $10,000 to $50,000 and one third needed more than $50,000. The primary source of this money was the entrepreneurs own resources but they often had to mortgage their homes, depend on credit cards, borrow money from the bank, or give part of the business to a venture capitalist.
Source: New era Management