(NNPA)—Whether you are launching a home-based sole proprietorship, partnership or expanding a corporation—beware of your legal business ownership structure’s strengths and liabilities. The ability to rapidly make competitive market decisions and raise investment money is often directly related to the legal structure of the business.
From the start consider the primary legal business structures that work best to achieve your financial goals. Research the business characteristics, asking questions of entrepreneur mentors or attorneys, always searching for the ideal solution.
What are the products or services? (example: fitness trainer, pet grooming, interior designer)
Do I need partners? (example: marketing, sales and financial directors)
How much money is needed to startup and grow? (write a detailed business plan)
What money sources are available? (example: bank loans, venture capital, stock issues, federal grants)
What are the liabilities and how can I limit them? (example: store owner or restaurant liabilities)
What are the taxes, fees, regulations and licensing burdens? (example: pest control or electrician)
Today, more than 75 percent of all businesses in the United States are sole proprietorships—owned by one person. The entrepreneur proprietor is their own boss responsible for all business decisions. The sole proprietorship is a flexible structure able to move quickly, adapting to changing market conditions. It is the least costly form with the government taxing revenues as personal income only. Any required paperwork is low cost and very minimal.
However, sole proprietorship has several weaknesses that include personal liabilities of business debts, liens or court judgments. Many entrepreneurs using this structure find it difficult to raise investment capital beyond savings or loans. It is often difficult to retain high quality employees using this method with limited benefits, salary and bonus resources. The sole proprietor often wears many hats as the business lifespan is highly dependent on the owner’s health including illness, accidents and death.
Alternatively, many entrepreneurs chose to share ownership responsibilities with two or more people forming a partnership. Partnerships have several advantages including shared workloads, personal income tax basis, employee incentives, shared profits and the ability to draw greater investment capital. A partnership typically requires setup by an attorney or accountant at relatively low cost. Liabilities are shared among partners unless protected by limited liability arrangements. The individuals may take on varying roles such as silent investors or dormant partners mainly focused on investment returns. Joint ventures are another form of partnerships that are set up for a specific purpose of limited duration.
Another option is the corporation, a legal form of business that the law recognizes as having the same rights and responsibilities as a person. The corporation exists separate from its owners therefore protecting them completely from most liabilities. As such, the corporation can legally sue and be sued, own property, agree to contracts and engage in business transactions. The typical charter setup fees for a corporation range from $1,000 to $3,000. Requirements include name, principle stockholders, board of directors, number and type of shares issued, place and type of business. Stockholders of a corporation may sell their shares at market value any time with the guaranteed right to vote as members on major company issues. In return the corporation may raise money by the public or private sales offering of its shares.
The federal and state governments regulate corporate entities closely with required financial disclosures and lengthy paperwork. Other variants of corporate structures include S corporations taxed as partnerships—ideal for small business structures as allowed by the Internal Revenue Service. The S corporation must meet specific requirements limiting the number of shareholders, stocks issued and sources of revenue restrictions.
As entrepreneurs grow the small business, it becomes increasingly critical to develop legal business structures that best suit their financial and personal goals; ideally taking into account family inheritance and retirement needs.
Many entrepreneurs initially launch a home-based business only intending to satisfy their simple lifestyle needs. Others drive themselves from day one towards achieving multimillionaire status using partnership and corporate business structures. A growth business owner must recognize not only present but also future potential legalities including various permits, taxes, employer paperwork, trademark, patent, and copyright requirements at both federal and state levels.
Initially, the savvy entrepreneur must overcome many challenges to achieve their personal and financial dreams. Likewise as their business grows, it is critical to protect any financial gains adjusting legal structures by consulting an attorney or trustworthy mentor.
(Farrah Gray is the author of “The Truth Shall Make You Rich: The New Road Map to Radical Prosperity, Get Real, Get Rich: Conquer the 7 Lies Blocking You from Success” and the international best-seller “Reallionaire: Nine Steps to Becoming Rich from the Inside Out.” He is chairman of the Farrah Gray Foundation. Dr. Gray can be reached via e-mail at firstname.lastname@example.org or his website at http://www.drfarrahgray.com/)