This is the first part of a multi part series that I should have started long ago, and I apologize for not doing so. This is more of a refresher course for some of you, but I feel it’s important to have this chronicled for those new to entrepreneurship.
When creating the next great startup, at an early stage you will come to a crossroads and must choose how to form your business. Which option you choose will have a number of ramifications and each will be discussed in detail over the coming days. There are four types of business formation methods that can be considered (although I wouldn’t recommend a couple of them). Your choices are:
- Sole Proprietorship
- Limited Liability Corporation
- C corporations
- Subchapter S corporations
When deciding which is best for you, keep in mind some of the following:
- Will I be conducting any business internationally?
- Are there any tax implications?
- What liabilities must I be aware of?
- Might I be faced with litigation at some point in association with customers, employees, or other businesses?
- What are my plans for future growth?
- What types of relationships are present with potential partners?
- Do I have a grasp on my capital requirements?
- What is my exit strategy?
While pondering those questions, lets take a further look into proprietorships and partnerships.
A sole proprietorship is a business venture that is solely owned by an individual. That person is also solely liable for any of the venture’s possible liabilities. This means that you have a personal liability to pay off anything not covered by your assets. Honestly, there are very few situations where this type of formation makes sense.
A partnership is a venture that is owned by two or more individuals. Like the above, each owner is fully liable. When we talk about a limited partnership, the limited partner is only liable for his/her capital investment.
When considering a partnership, consider the following questions:
- Who will maintain management and control?
- What resolutions are in place in case of dispute?
- Consider the financial and time contributions of each partner.
- What occurs in the eventual dissolution of the partnership?
- Can we add new partners?
Again, I don’t think I would ever recommend this type of formation either, but you do tend to see these – especially with professionals such as doctors and lawyers.
In the coming days we will discuss the other types of formations including corporations and LLCs along with suggestions on which type would be best for your type of business. Class dismissed.