What Factors Should Entrepreneurs Consider Before Choosing a Form of Ownership?
There are different forms or ways of getting into a business. An entrepreneur therefore should consider all the factors, such as liability for the business’ debts, before choosing the best form of ownership. The four major forms of owning a business legally in the United States are sole proprietorship, limited liability company, partnership and corporation.
The reason why most owners incorporate their businesses is to guard their individual assets. That way, if your company files bankruptcy proceedings in a court of law, no one can take away your personal property. Investors choose to incorporate their businesses depending on the potential and risk involved in the venture. Certain form of ownership offer business owners greater protection from personal liability for the financial problems. Entrepreneurs must weigh the potential for legal and financial liabilities for their companies' obligations. A limited liability company, or LLC, is a separate entity from its owner; hence, the owner is not liable for its debts.
Business owners should also consider tax laws, because some businesses are taxed heavily than others. Tax rates for each form of ownership constantly change due to amendments to the tax code. These fluctuations affect the amount of tax a company pays to the government. Sole proprietorships and partnerships pay income tax based on their net earnings, while corporations usually have more tax options.
Sole proprietorships and partnerships are easier to form than other forms of business. They require less time and money to register. They also do not have strict operating rules. Limited liability companies pay more incorporation fees, are required to comply with tough rules and make annual returns and a few other formalities. LLCs are also costly to run because managers and directors have to be hired to ensure that the company operates smoothly.
Some forms of ownership differ in their ability to raise capital. Corporations require large amounts of capital to finance their operations. As a business grows, its capital requirements rise. Corporations may find it easier to raise capital than sole proprietorships because they can issue additional shares or table rights issues. Banks also prefer giving loans to corporations over partnerships due to their perceived stability.