If you are considering starting up your own business, there are several things that you should consider starting with the type of business entity you want to form. Each business entity has its own characteristics and requirements. Take a few moments to review the pros and cons of each of the major business forms.
A sole proprietorship is just one individual who owns and controls the entire business. Pros: One person handles everything involved with running the business.Cons: If the owner is not available and no one else has authority over the business, the business may suffer due to no management. If an individual is appointed with authority, he or she will be running the company without a vested interest, which could lead to mismanagement.
Limited Liability Company
A limited liability company (LLC) is usually owned by a few different people but can be owned by one person. The members of the company can either run the company themselves or choose a manager or management team to run the business.Pros: The owners and managers have a direct relationship. The owners decide the best management structure to fit the needs of the company. In the case that a sole individual creates an LLC, it takes liability off of them and puts it on the company. Cons: Depending upon the structuring of the business, each member of the company has weight in the decision-making process. This can lead to disagreements and deadlocked decisions.
In a general partnership, each partner has a say in management. In general, each partner has equal rights; however, an agreement can be structured for certain partners to have a higher or lower stake in the business.Pros: An agreement may be structured so the responsibilities of the owners are based on their areas of expertise. Cons: If a partner institutes a contract all of the partners are bound by it and any liabilities that are incurred. Since each partner has a say in the decision-making for the business, there are opportunities for disagreements and deadlocked decisions.
A limited partnership is broken down into general and limited partners. There is at least one general partner who manages the company.Pros: Management decisions are still made by all owners. Limited partners have limited personal liability risks.Cons: Limited partners cannot be involved in the management of the company, but if he or she does, there is a risk of personal liability. Due to the limited nature of the partnership, an individual may be weary of becoming a limited partner. In such cases, it may be difficult for the partnership to raise funds. A partnership agreement needs to be drafted to avoid issues.
A corporation is owned by shareholders and managed by directors and officers.Pros: Corporations are usually managed by highly skilled individuals. A Board of Directors is elected, and these individuals manage the corporation. The officers implement the decisions of the board and run the daily operations of the company. Shareholders may or may not work in the corporation, and they receive dividends from the corporation either way.Cons: In order for a shareholder to have a role in management, he must also be an officer or director. Therefore, individuals who are strictly shareholders may find it difficult to have an impact on the trajectory of the corporation. As you can see, each entity has its own pros and cons. Consider these things closely when choosing both your type of business and your position in it.