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MO6 Discussion – Small Business Success

According to the U.S. Small Business Administration, sole proprietorships make up more than 70% of U.S. businesses.  Moreover, small businesses make up more than 99% of U.S. businesses.  With that said, statistics show that at least 50% of start-ups will close their doors within the first year of operation and even more within five years of operations.  Read the 2018 US Small Business Profiles

• Why is it important rather your business is a limited liability company, sole proprietorship, corporation, or franchisee?  What are the advantages and disadvantages of each?

Corporation– Well, it will depend on each person’s circumstances. In starting a corporation having an agreement in place outlines the business transaction, roles, and responsibilities, including articles of partnership. Creating a corporation is a legal entity that separates the liability from the owner’s personal assets. Also, the tax liability is separate, but the loss or gain from the company is passed to the owner/s personal taxes. When creating a corporation, an individual or a group of people has a common goal for the company. The company can issue stock in exchange for investment from the stockholder. The corporation can give each partner stock of 20% in exchange for an investment. The shareholder would not be responsible for the company’s debt, and their personal assets are protected if the business fails or gets sued.

The disadvantage is that any changes to the business structure or the corporation’s direction would need to be approved by the board of directors. If an individual thinks of starting a corporation, much work needs to be done, such as writing a business plan. In the business plan, you will research the name of the corporation, look at the market in the area to see if the business is viable, financial goals, pricing, and cost analysis with marketing and comparable. In order to have that balance, each partner/s needs to look at the other’s professional strengths and weaknesses. However, most importantly, you need someone you trust to do exemplary ethical business practices. If your partner/s commits illegal activity, each partner is at risk of white-collar crime; each partner’s personal assets can be affected. With a corporation, there are more rules and regulations to follow. 

Franchisee– A franchisee uses a company name; for example, McDonald’s, pays a franchise fee, including purchasing their product. The franchisee uses the franchiser’s business model, the brand of the product, and the license fee within the agreement with specific obligations. In starting a business, the owner will not need to reinvent the wheel as a figure of speech. As a franchise, the owner has very little control or say about the uniformity within the corporation. The franchise owner can use the trademark that the franchisor has already established. In other words, it is an expansion of the corporation to leasing franchise licenses by individual owners.

The disadvantage is that the franchisee is obligated to a contract agreement. As a Franchisee owner, you have no control or how the franchisor conducts business for all franchisors in the decision for their operation. The franchisor makes all decisions for the suppliers, products, and even the cost. There is franchise cost which is a monthly fee but also an initial upfront franchise fee for the license.    

Sole proprietorship– Most people who start a business will structure their business as a sole proprietorship, which is one of the accessible forms of business. The sole proprietorship can make changes according to their discretion, which will affect business; however, this impact can also jeopardize personal assets. The owner will take personal liability when creating a business should legal issues arise. The owner only pays taxes on the income minus all deductions.

The disadvantage of a sole proprietorship is that it does not separate the individual owner’s personal and business assets, which are intertwined. The owner pays all personal taxes on profits and is responsible for the company’s debt, and the creditor can go after personal assets to pay business debts. Should an individual/s or business bring a successful lawsuit against the company, the sole proprietorship owner may risk personal liability if the individual/s or business wins its case.

Limited liability– The limited liability company is formed mainly by law firms and accounting firms. Again, creating a business structure is based on individual owner/s and their requirement for personal liability and tax formation. Each partner’s liability is limited to their contribution and limited to the amount of their investment. Each partner is liable for their actions and avoids personal liability committed by the other partner.

The disadvantage is that each partner will be responsible for the debt the business occurs, whether the partner agrees or not.

• What type of business would you start and why?

Starting a corporation is one I would consider if I had partner/s, and I think there is more protection for your personal assets for the most part. When a company begins, there is always a risk, and keeping the two assets between business and personal separate is essential.

A corporation can have many owners, but the structure needs to be a president, vice president, secretary, treasurer, and forming board members to help guide the business for successful results. Establishing articles in the corporation, including bylaws, is helpful to have a direction for everyone involved in the company.

The good thing is that you can make a personal loan to the corporation money, and depending on the year-end, gain or loss can be passed to each partner through a K-1. Also, the corporation can raise funds in exchange for stock or shares in the corporation. Any business formation has pros and cons depending on the owners’ willingness to risk.

• In your opinion what type of business has the most advantages?

In my opinion, the advantage will depend on each owner/s. What does the owner want to accomplish, and are they willing to risk personal losses or gain? For me, the advantage would be a corporation or Limited Liability Partnership (LLP). With either entity, one will depend on the nature of the business if I provide a service or a product.

Class assignment

Written by: Greg MD