I have been receiving e-mails from retrenched and laid off people who wanted to start their own ventures in this time of recession, asking for my advice on what is the best form of organization for their business.
Will their business be set up as a single proprietorship, a partnership or a corporation?
While their dilemma may appear to be simple or even theoretical, yet in reality, it is not.
In fact, it is one of the most important factors to consider in starting a business, as it will impact on the extent of your personal liability as the owner, or partner, or a stockholder. It will also affect the future of your business, its survival, growth and profitability.
So, what is the best business set up? There is no “best” form, because it depends on your objective, the nature and type of the business, your product or service, the capitalization and the market that you want to serve.
If you want to do it alone, then sole proprietorship is right for you. As a sole proprietor, you own the business yourself, and you take all the profits and absorb the losses. This is because the business is you. Another thing is that the growth or failure of your business is entirely up to you.
If you think you need a partner or partners to run the business, then a partnership form is suitable for your purpose. In a partnership, each partner owns a share, which is equal to the amount of investment each contributes. One visible disadvantage is that if a partner dies or leave for one reason or another, the business is dissolved.
In addition, in a general liability partnership, which is the usual form, you and your partners are also personally liable for the debts of the business. In choosing a partner or partners, you have to consider the “chemistry factor”, where all of you can work together and smoothly as a team and complementing one another’s strengths and weaknesses. Otherwise, in case of misunderstanding and one of the partners leave the business, the partnership will also cease to exist, especially in a two-person partnership.
I have seen many well-run partnership businesses with potentials for expansion suddenly closing shop or for sale, just because the partners have misunderstanding between and among themselves, which had affected business operations
If you want stability and limited personal liability, a corporate set up is good. A corporation is considered as having a personality its own, an artificial person with an identity separate and different from its owners who are called the stockholders. As such, you as a stockholder are not personally liable for corporate debts. Even if the stockholders quarrel among themselves, with some leaving the company, yet the corporation will continue to operate.
In the last analysis, whatever type of organization you adopt, it is important to consider that the form is just a tool within which to implement your business strategy. The three basic goals of business remain the same –survival, growth, and profitability.