Deciding What Is Best for You

Deciding What Is Best for You

Now that you’ve looked at the advantages and disadvantages of the various types of business organizations, how do you sort through it all to determine which is best for your situation? If you have a lot of personal assets that you do not want to risk losing, you should probably incorporate or form a limited liability company. This is especially true if you will be engaging in a business that is more likely than others to subject you to lawsuits.

On the other hand, if you are starting your business on a shoestring budget and do not have a lot of assets to protect, a sole proprietorship may be a good choice. You can always convert your business into a corporation or LLC later.

A general partnership should usually be your last choice. Generally, you should only form a general partnership if you need that partner’s money or expertise and don’t want to spend a few hundred dollars to form an LLC or corporation. Instead, you may want to see if you can get the money as a loan or hire the person as an employee or consultant to get the expertise. This way you will not be giving up control of your business.

Before you commit yourself to taking on a partner, consider what may happen if you disagree. There will be times when a decision must be made that will determine the success or failure of your business. What are you going to do when you and your partner disagree on this decision?

Example: Suppose that about a year after you start your business, the nation's economy goes into recession. Your income drops drastically. You decide that it is necessary to increase spending on advertising in order to reach the customers that are still in a buying mood (this is a commonly accepted and recommended course of action in the business world). Your partner insists that you must cut spending in all areas, especially advertising. What will you do?

If you decide to take on a partner, it is important to choose your partner care­fully and to prepare a good partnership agreement. This can help reduce friction between the partners by clearly defining what each partner's role is in operating the business. One of the most vital parts of the agreement is to agree on how to settle disagreements. However, no partnership agreement can totally prevent friction between partners. This is why it is important to choose the right partner and to consider such things as your respective personalities, comfort with risk, goals, philosophy of life, etc.

Example: If you are a workaholic and your partner does not believe in work­ing weekends, you may begin to feel that you are doing all of the work. You may become resentful of your partner.

Next, we will look at the law that governs partnerships, as well as your proposed partner or partners.

  • Overview of Businesses and Partnerships
    This section will explain various types of business organizations and help you decide if a partnership is the right form for your business. Types of Business Organizations A partnership is only one type of business organization. There are basically five types of business organizations:
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  • Personal Liability
    To fully understand partnerships, as well as all other types of business entities, it is important to understand the legal concept of personal liability for business obligations. There are always financial risks associated with starting a business. One risk is that the business will fail to make...
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  • General Partnerships
    General partnerships are the most basic type of partnership, and are little more than an agreement between two or more people to run a business. General partnerships have fallen out of favor, being replaced by other types of business structures because they don’t offer liability protection for...
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  • Limited Partnerships
    A limited partnership (LP) is where two or more people own a business, but there are two classes of partners: general partners (who own and operate the business), and limited partners (who invest their money or property in the business, do not have the right to make decisions regarding the...
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  • Limited Liability Partnerships
    A limited liability partnership (LLP) is basically a general partnership, but with the addition of giving the partners at least some limited personal liability. There is only one class of partner (general partners).
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  • Limited Liability Limited Partnerships
    A limited liability limited partnership (LLLP) is a type of partnership that is very similar to a limited liability partnership (LP) in that it has two types of partners, general partners and limited partners. Unlike an LP, however, the general partners in an LLLP have some liability protection....
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