Forms of Business Ownership
Review this overview of the various forms of business ownership, including advantages and disadvantages, to learn about some of the factors that go into deciding which form is best for any given situation. No hard and fast formula helps an entrepreneur pick the proper form. However, there are some important considerations, such as risk, taxes, transferability, and even image. After you read, complete the concept check questions about the different types of business structures: sole proprietorship, partnership, and corporations.
Partnerships: Sharing the Load
Advantages of Partnerships
Some advantages of partnerships come quickly to mind:
- Ease of formation. Like sole proprietorships, partnerships are easy to form. The partners agree to do business together and draw up a partnership agreement. For most partnerships, applicable state laws are not complex.
- Availability of capital. Because two or more people contribute financial resources, partnerships can raise funds more easily for operating expenses and business expansion. The partners' combined financial strength also increases the firm's ability to raise funds from outside sources.
- Diversity of skills and expertise. Partners share the responsibilities of managing and operating the business. Combining partner skills to set goals, manage the overall direction of the firm, and solve problems increases the chances for the partnership's success. To find the right partner, you must examine your own strengths and weaknesses and know what you need from a partner. Ideal partnerships bring together people with complementary backgrounds rather than those with similar experience, skills, and talents. In Table 4.2 you'll find some advice on choosing a partner.
- Flexibility. General partners are actively involved in managing their firm and can respond quickly to changes in the business environment.
- No special taxes. Partnerships pay no income taxes. A partnership must file a partnership return with the Internal Revenue Service, reporting how profits or losses were divided among the partners. Each partner's profit or loss is then reported on the partner's personal income tax return, with any profits taxed at personal income tax rates.
- Relative freedom from government control. Except for state rules for licensing and permits, the government has little control over partnership activities.
Perfect Partners |
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Picking a partner is both an art and a science. Someone may have all the right credentials on paper, but does that person share your vision and the ideas you have for your company? Are they a straight shooter? Honesty, integrity, and ethics are important, because you may be liable for what your partner does. Be prepared to talk about everything, and trust your intuition and your gut feelings - they're probably right. Ask yourself and your potential partner the following questions - then see how well your answers match up:
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Table 4.2