19

Selecting a Business Structure

Goals:

• Introduce the advantages and disadvantages of three common business structures: sole proprietorships, partnerships, and corporations
• Encourage prospective entrepreneurs to seek professional advice when deciding how to structure a new business

Skills:

• Develop an appreciation of factors associated with each business structure including ease of the formation, management control, taxation, and liability
• Understand the need to develop a written partnership agreement if the business is started by more than one person
• Enhance ability to seek advice from professional advisors

Overview:

Every business has a business structure. If no decisions are made and one person starts the business, it is a sole proprietorship. Group discussions emphasize the value of separating personal and business finances and managing business-related transactions in a professional way.

If no decisions are made and more than one person starts a business, it is an informal partnership. It is important that partners understand the value of developing a formal (written) partnership agreement. The group discusses areas in which partners may have different opinions (i.e., profit taking vs. reinvestment, hours worked, vacation, staff hiring, compensation, leaving the business, selling the business)

Most entrepreneurs begin operations as either a proprietorship or partnership. As the business grows, incorporation may help the business share ownership with employees, raise capital, manage taxes, or limit personal liability. Although this chapter provides a basic introduction to incorporation, it focuses on sole proprietorships and partnerships.