Types of Business Organization
June 17, 2002
There are six types of business entities, and each offers its own
distinct benefits and negatives. It behooves the would-be business
owner to look into each and decide which best fits his/her needs.
Generally speaking, it is to the owner's benefit to hire a lawyer
to handle the incorporating duties, if needed. The cost is not
usually that huge, and lawyers come equipped with red-tape cutting
brains (at least the good ones do).
By choosing the best type of business entity from the beginning,
people can avoid later problems and costs that are not necessary.
Here are the types of business organization to be considered:
- General Corporation: Known as a "C" corporation, it
may have an unlimited number of stockholders. It usually
involves more than 30 stockholders or large public stock
offerings, and each stockholder's personal liability is more
often limited to their investment.
- Close Corporation: Probably the best choice for a
lone individual starting a company or one started by a small
group of people. The number of stockholders is limited to 30,
and directors wishing to sell stock must first offer it to other
stockholders.
- S Corporation: For those who wish to be taxed as if
they were still sole proprietors or partners. It pays federal
income tax on its profits, offers limited liability for the
individual. S Corporation income is reported only on the
stockholders' personal income tax. There can be no more than 75
stockholders.
- Sole Proprietorship: One person owns and runs the
company and is responsible for all liability, profit, or loss.
- Partnership: Two people go together to form a
business, and together are responsible for all liability, profit,
or loss. Types of partnerships include general, limited (where
only one of the two is liable for the partnership beyond making a
contribution, and joint venture (in place for a pre-determined
amount of time).
Emergency Planning
The other consideration is that just because you are extremely
intelligent and creative, the business might struggle anyway.
Therefore, it is important to have a plan designed to help handle
emergency situations. This doesn't include natural disasters and
that type of emergency, but it does include unexpected equipment
loss, equipment upgrades, supplies, loss of work time because of
health or injury, and even a simple economic slowdown.
Maintaining good business continuity can mean the difference
between profit and being out of business.
Because computers and software are so dependable, you can expect
one or the other to go bad at anytime. It's going to happen.
Plan on it. It is important to keep backups of files that you
create, but it also important to keep backups of software, too.
Rather to reload than to have to re-download or re-purchase. In
our case, we also have backups for computers, printers, scanners,
etc. That way, interruption to business is kept at a minimum.
It is vital to examine the impact of business emergencies,
determine what they might be, and what you can do about them
when, and if, they occur.
Economic slowdowns are another issue. Perhaps the best plan to
avert slowdowns is to offer a diversity of services so that if
one element is hindered, the others can take up the slack.
Types of services that you may wish to offer include: Forms,
charts, graphs, news releases, newsletters, brochures, catalogs,
ghostwriting, product identification (labels), print advertising,
photo restoration, photo effects, logo design, billboard design,
book cover design, scanning, and radio advertising scripts.
Since I began my company in 1989, I have added services to it
rather steadily. In the past three years, we also added radio
ad recording and music creation for those who want custom, real
(see non-Midi) music for their web sites.
The one problem with all that it is that it does require a cash
outlay for equipment. For example, to print newsletters it is
best to have a larger format printer. To make audio
(and do it well) requires mixers, microphones, and other audio
equipment. That stuff does not come cheap, but spaced out over a
period of time, it can easily pay for itself.
Summary
There are a number of things to consider when starting a business.
For those who engage in a small business, such as a sole
proprietorship, a partnership, or a small S Corporation, they
must consider all things good and bad that can happen and then
make plans to deal with those things.
The bottom line is that a business is a business and cannot be
operated like a hobby. That doesn't mean you can't enjoy it,
but it does mean you have to pay attention to the same details
that every business must in order to make it profitable. And,
believe me, there is no greater enjoyment in business than profit.
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