Organization

[Back to top]

Should You Have a Partner

Testimonial B.J. Adelson Lawyer "If you get advice from a professional, listen to him or her. He or she probably knows better than you do." Transcription - html

It is best to make your decision concerning whether to have a partner by preparing a "for" and "against" list. The most common reasons for joining with another person to start the business are:

• There is safety in numbers. In other words, you have two heads instead of one to discuss and make decisions.
• You will not need to be at the business at all times. You will have someone else who will be there to share the load and permit you to take a vacation and have sick time.
• You will also have a highly motivated co-worker, not just someone who is earning a paycheck.
• Partners can also be advantageous when they have complementary skills.
• It may be necessary to have a partner to contribute capital and share the risk when things do not proceed as planned.

Some of the arguments against having a partner are:

• You will have to share the rewards if the business is successful.
• You will lose total control over the business, particularly if you and your partner have difficulty in making decisions.
• You will have to share the recognition that will come if the business is successful.
• A partner can be a disaster if his judgment is not good.
• You run the risk of a falling out and perhaps the necessity of one partner buying the other out if you do not get along.

Some of the things to consider in deciding whether a particular person will make a good partner are whether you have similar work habits, similar objectives concerning how to run the business and whether your strong points are similar or complementary. For example, different capabilities permit you to spread the workload and provide better coverage for problems.

Different capabilities may permit you to give each partner a veto over important decisions in his or her area of expertise to help maintain stability and eliminate conflicts. Finally, you may want to consider whether you should have a buy-sell agreement in the event of a disagreement, and how the purchaser will pay for the portion of the business he or she is buying (and whether you should fund the buy-sell agreement with insurance in the event of the death of a partner).

[Back to top]

What Type Of Business Organization Is Best For You?

Testimonial Gary Hobday Secured Retirement, Inc. "Looking to the retirement future is very important." Transcription - html

Whether you are going it alone or with another person, it is best to consult a lawyer to determine which form of business organization will be best for you. Your choices and the attributes of each form are essentially as follows:

• A sole proprietorship is one person alone. He will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on his or her personal income tax return along with all other income and expense he or she normally reports (although it will be on a separate schedule). Although proprietorship avoids the expense for forming a partnership or corporation, many start businesses this way because they are unfamiliar with the other forms of organizations.
• In a general partnership each of the two or more partners will have unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his pro-rata share of the profit or loss from the business as one line on his personal tax return.
• With a limited partnership, each of the general partners has unlimited liability for the debts of the partnership, but the limited partner's exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.
• A corporation provides limited liability for the investors. Except as indicated below, none of the shareholders in a corporation is obligated for the debts of the corporation; creditors can look only to the corporation's assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings. A corporation has some tax benefits such as deductibility of health insurance premiums.
• A corporation that has made an election to be an "S" Corporation for federal income tax purposes is treated as a partnership for tax purposes although it is treated as a regular corporation for other purposes.
• A limited liability company provides limited liability for all of its members, but typically can be treated as a partnership for federal income tax purposes. State laws may differ as to whether it is treated as a partnership or a corporation for state income tax purposes. It can be managed by all of the members or can have centralized management in one or more of the members.

Obviously there are variations in these rules and you should consult with your attorney and/or accountant in each specific case to determine what form of organization best fits your needs.

One of the things to consider in making the final decision is that although a corporation has limited liability for its shareholders, if the corporation does not have sufficient assets various creditors may insist on personal guarantees from the shareholders. Examples are your landlord, some suppliers, and, by law, liability for certain payroll taxes and liabilities to employees.

[Back to top]

Laws That May Affect You

There are many laws that are applicable to owners of small businesses. It is best to consult with professionals to determine which laws will be applicable to you, what permits you will need to commence business and where to go to comply with the various rules. Your attorney should be able to assist you in complying with labor laws such as the employment of minors, illegal aliens and workplace safety rules. Your accountant should be able to assist you in filing:

• Income tax returns
• Franchise tax returns
• Employment tax returns
• The time for payment of withheld and employers share of employment taxes
• Unemployment tax returns and payment
• Sales tax reports and payments

Your attorney may be able to help with requirements for business licenses including special licenses for particular businesses as well as building codes and permits for remodeling and zoning laws, health department requirements and environmental laws.

[Back to top]

How Can Your Professionals Help You?

Your attorney

In addition to the above items, your attorney should draw your partnership agreement, or form your corporation, including the issuance of stock and appropriate filings with the Secretary of State and the Department of Corporations. He or she will help advise on the best form of ownership, assist in negotiations to buy an existing business and review documents if you are buying a franchise. He or she will also advise on buy-sell agreements and draft appropriate documents.

If your business will require renting an office, store or factory, your attorney should review and approve your lease document. A lease obligation can become your biggest liability and your attorney can help negotiate fair and protective terms. For example, if you anticipate growth, your lease should include a provision for how expansion requirements will be handled.

Your new business may require specialized legal advice to establish and protect your intellectual property rights. Intellectual property includes your ownership rights to your business name, trademarks, copyrights and patents. Intellectual property law is a specialized field and you may need an attorney who specializes in these matters.

Your accountant

Your accountant can be an important advisor in start-up decisions, such as:

• To decide what would be the appropriate division of the capital you contribute to a corporation between stock and loans
• To determine the best form of ownership
• To help set up the books and records of the business
• To advise on computer needs for accounting purposes.

He or she will have a continuing role in filing tax returns, advising on compensation of owners, preparing financial statements, helping forecast cash needs, including whether to expand, addition of employees, and whether you are really making money in this venture.

Your Payroll Service Provider

"Payroll Service Providers" can take over the responsibilities of a Human Resources (HR) department. They can handle your:

• Payroll, including tax deposits, payroll tax returns and reports
• Employee handbook development
• Assistance with hiring, interviewing, disciplining and training employees
• Benefits administration
• Unemployment insurance administration

Your Pension Plan Manager

As a business owner you can participate in the benefits of tax deferred pension plans for yourself and your employees. Good pension planning will help you attract and keep good employees. Some payroll service providers now handle pension plan management.

Your professionals can also be of significant assistance in helping formulate your business plan by advising on:

• The appropriate form of organization
• Allocating roles to each partner such as how much control each party will have
• The areas in which each will have primary responsibility and how much ownership each party will have.

In connection with the acquisition of an existing business, they should advise on good and bad terms of the proposed deal and help negotiate with the seller and his or her attorney.

Finally, they should advise on your need for capital, both at the inception of the business and what additional capital will be needed if the business is successful and you decide to expand.

[Back to top]

Suggested Activities:

• Before you start-up, collect referrals to and references about lawyers, accountants and insurance agents so you can select the most appropriate professional advisors well before the time you will need their services. Perhaps they will provide you with initial free consultations for your considering them as members of your professional team.

[Back to top]

Business Plan for Session 4: Organization

We heartily recommend that you download the individual business plan template for this session Business Plan Template Document 4 and complete it now.

Section 4: Organization and Professional Advisors

MS Word

Instructions on filling in the business plan template:

1. Each box has a permanent title in CAPITAL LETTERS
2. Below each title is a sentence starting with an "Insert here…" sentence. This will suggest information to insert. The boxes will enlarge as you take up more room so use all the space you need.
3. After completing each box, delete the "Insert here" sentence, which will leave only the permanent title of the box and the information you have filled in.

We suggest that you fill in each section of the business plan
as you proceed through the course.

The template for all sessions 1-12 can also be downloaded into your computer as a single document:

Section 1-12: All

MS Word

Include sufficient research findings and background materials. Make it interesting up by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 12 sections.

Many other business plan formats are available in libraries, bookstores and software.

[Back to top]

SESSION 4 Quiz: Organization and Professional Advisors

Proceed to Session 5: Insurance