HAVE YOU THE RIGHT KIND OF BUSINESS ORGANIZATION?
Posted:2 November, 2008 by adminWhen you start your mobile-home park, there will be so many pressing problems that you may not consider the kind of business organization that is best for your operation. When you’re worried about capital, picking a site, construction problems, and a hundred-and-one other things, it is natural to delay a serious consideration of the form of organization. Will you run the business as a proprietorship? Will you go into partnership with someone? Will you set up a corporation? Each form of organization has its advantages, and you should be familiar with them.
Don’t make the mistake of starting a business with friends or relatives, thinking you don’t need a clear understanding of the responsibilities and contributions of the various people involved. In the long run the best way to keep friends in business is to make clear in advance what everyone’s responsibilities are going to be.
A person often overlooks this because he is sensitive about how a partner or relative will take it. Experience proves, however, that more trouble is caused when things are not spelled out than when a definite understanding is reached. Both parties like to have the issues clarified but are sometimes too polite to bring them into the open. Make sure you discuss them thoroughly in advance before you go into business.
Here, in brief, are the advantages and disadvantages of the different forms of the business organization. Check with a good attorney to see which type is best for you.
Individual Proprietorship
Most small businesses are owned and operated by individuals on a proprietorship basis. The individual proprietorship leaves the owner completely independent. He can conduct his business as he sees fit and take whatever steps are necessary for its success. Since he takes all the risk, he has all the authority.
The complete independence of the owner is itself one of the greatest disadvantages of the individual proprietorship. He may carry out his plans with complete freedom, but, since only one person is involved and capital and experience are limited, his chances for success are reduced. Also, the debts of an individual are collectible against his entire estate and are not limited to the assets of the business. The unlimited authority of the pro- prietor, therefore, carries with it unlimited liability that may expose the owner to losses far greater than in some other form of business organization.
An individual proprietorship is best when a business can be managed efficiently by one person and when the owner has little need for outside financing.
Partnership
A partnership is an association of two or more persons in a business enterprise. The partnership is similar, in many ways, to the individual proprietorship. It is easy to organize and retains the personal element of the owners.
The responsibilities, liabilities, sharing of the profits, and the authority of the partners are provided for in an informal or formal agreement. The agreement is usually in writing, but it may be implied through the actions of the parties. To avoid misunderstandings, a partnership should be defined in writing when the organization is formed.
The written agreement is known as articles of partnership. It is typewritten, signed by the partners, and notarized and contains information about the partners, name of the firm, nature of the business, amount of capital to be contributed, sharing of the profits and losses, compensation to partners for their services, arrangements for withdrawing or increasing original investment, provisions for dissolving the firm, and so on. Any attorney can draw up a good draft of articles of partnership.
There are many advantages to a partnership. It permits the pooling of capital, experience, skills, and contacts of two or more individuals. It spreads the risk, increases the possibility for expansion, and improves credit standing. As a rule, the combined effort of several partners is more effective than the individual proprietor. Its ease of formation and the simple procedures for reorganizing the partnership relationships make it an effective means for bringing together the business interests of several people.
There are several disadvantages, too! Legally, the actions of one partner are binding on the firm and on each partner of the firm. Claims and lawsuits that arise from the acts of one partner can be satisfied against the other partners, as well as against the firm itself. Most state laws, however, require that creditors exhaust partnership assets before attaching the private properties of the individual partners.
Corporate Organization
A corporation makes possible the accumulation of a large amount of capital by means of stock shares and the investing of this capital in a single business in which the individual investor is not liable beyond the value of his shares. Corporations are created by the state through a charter that represents a con- tract between the incorporators or prospective stockholders and the state. The organization is perpetuating and does not depend on the life of any one stockholder. The issue and sales of shares permit the separation of ownership and management. People can be hired for their managerial, technical, or productive abilities whether or not they have capital to invest.
When a corporation is chartered, it is authorized to do business and to own and manage property. Personal liability is limited to the shares held by the individual; so, if failure occurs, the stockholders’ personal properties are not affected.
Corporate organization has the advantages of limited liability, centralized control and management, and the ability to transfer or sell ownership shares. It is adaptable to businesses that require more capital, larger operations, or a reservoir of technical or administrative skills.
The disadvantages of a corporation are many and should be carefully considered. The cost of incorporating and the expense of issuing and transferring stock may be high for the business involved. The limitations and regulations imposed by the state, as well as increased taxes, often outweigh the advantages. A key disadvantage is the difficulty of obtaining outside financing. Creditors know they are restricted in proceeding against individual stockholders, so they are usually hesitant about extending credit.
Where a simpler form of business organization is practical, the disadvantages of corporate organization may be important enough to discourage its use.
