Suppose you were an entrepreneur who wants to start a business. Which type of business organization would you establish–a sole proprietorship, a partnership or a corporation. An experienced Park City, Utah corporate lawyer can help you make a decision.
A sole proprietorship is a business that is owned by one person. The owner of a proprietorship may be the only employee, perhaps operating a small convenience store, barbershop, or specialty shop. Or, the owner may hire many employees to staff a larger business such as a restaurant, an auto service station, or a home construction enterprise. The sole proprietorship is the most common type of business in the United States.
Advantages of Sole Propietorships
The sole proprietorship is the easiest type of business to form. To set up you must comply with local zoning laws, which tell you where the firm can or cannot be located in your town. State and local authorities have standards for cleanliness that your firm must follow if you are selling a food product.
Another advantage to the proprietorship is your ability to make decisions quickly. You are the owner and the boss! This gives you the authority to make virtually all business decisions about how to organize your shop and sell your products. It also gives you an enormous sense of satisfaction when the business prospers.
Finally, as the owner you are in line to reap all of the profits from the sale of your product. Profits occur when your firm’s total revenues are higher than its total costs. This is your reward for starting the business! As an added bonus, the tax rates for proprietors are lower than they are for corporations. This allows you to keep a larger percentage of your profit than the owners of corporations can.
Disadvantages of a Sole Proprietorships
Proprietorships are not particularly easy to finance. This is because banks are hesitant to extend a loan to you unless you are willing to put up some collateral–most likely your home–as a guarantee that you will repay the loan. But borrowing money to cover initial expenses such as rent payments for the shop, wages for your employees, and so on is common for proprietors.
Next, you have unlimited liability. This means that if the business does fail, you as the proprietor are personally responsible for all of the firm’s debts. If your firm fails you may have to sell your house, or dig into your personal savings account to pay your creditors.
Finally, you cannot be an expert in all phases of running a business. That is, as the proprietor you will make decisions about hiring and firing workers, keeping enough office supplies on hand, monitoring inventories, attending to customers in the shop, making deliveries on schedule, keeping records, paying taxes, and so on. Suppose you fall ill or are involved in a serious accident that prevents you from doing your job for weeks, months, or longer. What would happen to the business? Because the success of the sole proprietorship rests mainly on the shoulders of the proprietor, proprietorships are considered the least stable type of business organization.
A partnership is a business that is owned by two or more people, each of whom has a financial interest in the firm. The types of firms that ordinarily form into partnerships are very similar to those that become sole proprietorships. Professionals often form into partnerships such as law firms and medical practices. Partnerships are also common in the skilled trades areas such as plumbing, home construction, and electronic repair services.
There are two main types of partnerships–the general partnership and the limited partnership. In a “general partnership” the partners are involved in running the firm and, therefore, share in the day-to-day decision making. In a “limited partnership,” some of the partners run the firm while others simply invest money in it. If you were considering a partnership for your new firm, a necessary first step would be to draw up a “partnership contract” between you and your partners. Expert legal advice is needed to specify the responsibilities of each partner, to determine how the firm’s profits will be distributed, and to state how you will dissolve the firm if things just don’t work out. Speak to an experienced Park City Utah corporate lawyer for assistance.
Advantages of a Partnership
Partnerships are fairly easy to organize. Certain zoning and licensing codes must be complied with, but the paperwork is fairly simple. Your partnership contract should also be drawn up before the business opens. It is also easier to get the start-up funding for a partnership than it is for a proprietorship. For example, you could take on one or more silent partners to supply the necessary funds. You are also more creditworthy in the eyes of the bank because the collateral that you and your partners can bring to the table is greater than that of the proprietor.
Secondly, decision making is more expert in a partnership than that in a sole proprietorship. Each of your partners will, most likely, bring a special talent or skill to the firm. If your business is organized as a partnership different partners may be skilled in customer service, accounting and payroll, maintaining inventories and supplies, and so on. And if each partner performs as you expect, all can achieve the sense of pride and accomplishment that is derived from owning a successful business.
Finally, you realize that the fruits of your labor–the firm’s profits– belong to you and to your partners. Your share of the profits, and that of your partners, was carefully spelled out in the partnership contract. And your tax rates, like those of the proprietor, are lower than those faced by corporations.
Disadvantages of a Partnership
One disadvantage is that partners in a general partnership have unlimited liability for business losses. In this respect you have the same disadvantage as the proprietor. But in a partnership you are also responsible for the business debts of your partners. This is a sobering thought as you consider possible partners. On a related note, also consider that if you create a limited partnership, your silent partners have limited liability. That is, the most they can lose in this business venture is the amount they originally contributed to it. Creditors cannot come knocking at their doors for the debts that you have created.
Another disadvantage of a partnership is that disagreements among partners can reduce the stability of the firm. Ideally, the partnership contract should specify each partner’s role in the firm. But this piece of paper cannot account for your partners’ personality or other character traits. Suppose one of your partners decides that his voice is more important than yours in the decision-making process, or one or more partners are slacking off? These questions concern you as you consider the best structure for your firm.
A corporation is a business that is legal entity in itself. In a corporation, ownership of the firm (stockholders) is separated from the operation of the firm (management). Many types of firms organize into corporations, such as manufacturing companies, financial institutions, retailers, and so on. Corporations account for about 90% of all sales of goods and services, however, which makes the corporation the dominant form of business enterprise in the country.
The division between owners and management occurs because a corporation sells shares of itself to many investors. These shares are also called stocks; hence stockholders are the owners of the corporation. Because there are so many stockholders, they select a Board of Directors to oversee and set goals and policies for the corporation. The Board of Directors, in turn, hires professional management to run the company. The top official in most corporations is the chief executive officer (CEO). Beneath the CEO in the chain of command is the company President followed by a series of Vice Presidents–each of whom has a specific responsibility in the production, marketing, or distribution of the good. It has been said that corporations are like people–no two are exactly the same. There is some truth to this statement. The CEO and the President, for example, might be the same person. One corporation may have six vice presidents while another might have a dozen. There is no “correct” structure for a corporation.
Advantages of a Corporation
One advantage to starting a corporation is that start-up funds are easier to get. Corporations are the only form of business organization that can raise funds by selling stocks and bonds to investors. If you sell stock in the corporation, you are selling a piece of your company to somebody else. This is because stocks represent ownership in the corporation. If, on the other hand, you sell bonds to investors you are simply borrowing money from them. This is because bonds represent debt–the corporation is the debtor and the investors become its creditors.
Secondly, expert managers can be hired to run the business–the CEO, President, and Vice Presidents in charge of production, marketing, and so on. And you, the founder of the firm, might occupy an important position on the Board of Directors–perhaps even “chairman” of the board.
A third advantage is limited liability for the stockholders. That is, the maximum amount of money that you could lose in your business is the amount that you invested in it. If your business is organized as a corporation your home and personal assets are protected.
Next, your financial rewards can be substantial–if the firm is profitable! You can see three ways to make money if you start a corporation. The first is through stock ownership. As the founder of the business you most likely reserved a number of shares for yourself, and sold the rest to investors. These shares offer dividends to investors, including you, when the firm earns profits. Dividends are the regular payments made to investors by profitable corporations. The higher the firm’s profits, the more the firm can afford to distribute in dividends. Stock ownership offers a second way to earn money–capital gains. Capital gains represent the difference between the purchase price of a stock and its selling price. When an investor sells a stock for more than its purchase price, the investor earns capital gains. A third way you might reap financial rewards is through the ownership of corporate bonds. Bonds pay interest to investors.
Finally, a corporation is the most stable type of business. This stability comes from the wide distribution of the firm’s stock. What does this mean for your business? Because many people own shares of your company, sickness, accidents, even the death of a stockholder, have no impact on the company itself. If a stockholder dies, the shares of stock are simply passed along to the stockholder’s heirs.
Disadvantages of a Corporation
One disadvantage is that forming a corporation is a complex process. You first must apply to your state government for “articles of incorporation.” This application lists some of the details about your proposed business including what it will produce, where it will be located, how start-up funds will be raised, and who can be contacted if problems arise. Legal fees and other expenses could also be substantial.
A second problem is the length of time it takes for a corporation to make decisions. Corporate decisions are sometimes examined and re- examined at different levels of the corporation–by department heads, by vice presidents, and so on. As the corporation grows you, like other investors, might also feel less attachment to the business. This is because stockholders contribute nothing to the actual production of the good. Thus, there is little sense of satisfaction or pride in your personal contribution to the firm’s success.
Third, taxes on corporate profits are higher than the taxes on the incomes of proprietors or partners.
Selecting the right business structure is very important for any business. Speak to an experienced Park City Utah corporate lawyer. The lawyer can explain to you the advantages and disadvantages of all business structures and help you pick the right structure for your business.
Free Initial Consultation with a Corporate Attorney in Park City Utah
When you need legal help with a business in Park City Utah, please call Ascent Law for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506