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.