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Types of Start-up Businesses
When creating a start-up business, there seems to be a million
different things that have to be taken into consideration. Finding
money, perfecting a service, product or line, making important
connections, and other tasks create a bewildering array of decisions
that need to be made. One such decision that shouldn't be overlooked
is the type of organizational structure you'll be using. There are
multiple kinds, but all of them are chosen on the basis of taxes,
management direction, and matters of legal liability.
A sole proprietorship is the most basic organizational structure,
and a particularly common one among start-up businesses to boot. In
the sole proprietorship structure, the founder of the company takes
in all the profits and has all the decision-making power. Needless
to say, organizing such a company is also an easy task.
Unfortunately, this is where the benefits end. Any profits you make
are taxed as personal income, your company will pay higher taxes,
and you take on all legal responsibilities for your businesses'
actions, meaning that personal assets are vulnerable to fines and
taxes. Still, going it alone can be a good plan for some start-ups.
When two, three or even more people come together to start a
business, it is called a partnership. There is more legal paperwork
that needs to be taken care of in this type of arrangement than
there would be with a sole proprietorship. Each partner needs to be
aware of his or her own level of liability, as well as the
repercussions of walking away from the partnership. Sit down
together and work all of these details out so that they don't become
sticky issues later. Make sure that there is an equal balance of
power and that everyone is comfortable within their own role. Most
importantly, get it all on paper so there is always a document to
refer back to if there should ever be a disagreement.
A limited partnership works much as a partnership, though there are
a few key differences. The first is that partners, as either
investors or advisors, serve under the same rules as a partnership,
but not all partners are equally liable in a legal sense, though at
least one partner must agree to take the unlimited legal liability
attached to a sole proprietorship. The second is that partnership
agreements include clauses that provide for a return on any
investments made into the start-up, which can be a good way for
start-up businesses to get the beginning funds they need. This rate
of return is chosen at the time the agreement is made.
Finally, there's the option of incorporating your start up,
effectively turning your company into a legal entity separate from
owners and employees, at least in terms of legal liabilities. This
protects your assets and, even better, can be done on your own.
However, there are multiple kinds of incorporation that a company
can become, and each one is held to different rules and standards by
the government. Some possible drawbacks include increased cost,
tighter regulations, company size requirements, and limited
financing options in the future, depending on what type of
incorporation you choose.
While you may be anxious to get into the more exciting aspects of
entrepreneurship, don't neglect the legwork that needs to be done to
get you started on the right foot. Make sure that your legal
documents are in order and are as detailed as possible. This will
help insure that you and your partners are able to work through
conflict and disagreements, as each will be assured that their own
interests have been protected as much as is possible.
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