Choosing the Right Business
Entity
The first issue entrepreneur(s)
face is a type of business form to choose whether
to operate as a sole proprietor, a partnership,
or a corporation. Choosing any of these forms
has advantages and disadvantages.
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The
advantage of operating as a sole proprietor or a
partnership is that there is no registration requirement
with a state agency. However, the disadvantage is
that the owner(s) are personally liable for the
debts of the business, which means there is no liability
shield.
Of
course, the owner must consider many other factors besides
a liability shield before selecting a business entity.
Factors include allocation of profits and losses (if
profits and losses would be proportionate to capital
contribution); confidentiality and non-compete (if there
are trade secrets that need to be protected or territory
that the partnership needs to protect); and dissolution
rights (how the partnership assets would be distributed
in case of a death, retirement, or disability).
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On
the other hand, a corporate structure and a limited
liability company (LLC) forms provide liability
protection. In other words, if the business takes
a turn for the worse or a business owner makes a
mistake, those mistakes may not cost the owner personal
assets to satisfy business debts.
Other
advantages are that these two forms could be a very
useful tool for estate planning or income splitting.
Whether these advantages are best for your business
depends on individual goals. A goal might be to avoid
Medicare taxes if at all possible. Another person may
need Social Security benefits. Before some professionals
can render professional services, they must obtain additional
regulatory approvals, e.g., accountants or lawyers.
For a better understanding please review the article
..Read on.
Contracts
There are various other contracts such as employment
agreements, franchise agreements, nondisclosure agreements,
etc. that most entrepreneurs encounter.
An agreement between an employer and employee that
defines rights and responsibilities of both parties
is an employment contract. Employment contracts generally
include details such as salary, benefits, confidentiality
clauses, and non-compete agreements. These clauses
also include the duration of non-compete agreements
and the rights of both parties.
A document that sets out all the terms and conditions
that will govern the relationship between a franchisor,
e.g., McDonalds and a franchisee is a franchise agreement.
In other words, it is document that describes rights
and responsibilities, e.g., a method of doing business,
trademark rights (trade name franchising), and the
cost of doing business. The most obvious advantages
this method offers to franchisees are proven name
and formula for doing business as well as the support
system. However, the loss of control and added expense,
e.g., royalties and annual fess are the two most obvious
disadvantages of operating a business as a franchise.
A nondisclosure agreement or confidentiality agreement
is promise to protect privileged information such
as new formula or new design or business method. The
agreement could be between an employer and an employee
or between a seller and a buyer (investor). It is
an agreement that describes the terms and conditions
of the agreement such as what is confidential information
or what are the obligations of the parties under the
contract.
Lease Terms
The perception that leases are standard is incorrect.
Thus, depending on the position of the parties, entrepreneurs
can negotiate the terms of a lease. It is important
to understand that there are hidden dangers and costs
associated with leasing a premise. Some of the issues
include length of the lease, rights of renewal, treatment
of fixtures, improvements, default and remedy clauses,
allocation of taxes, assignment rights.
Buying or Selling a Business
Buying or selling a business is one of the most
important decisions an entrepreneur has to make about
the business, which requires strategic planning. An
entrepreneur(s) must determine if the business would
continue in case of death, disability, or retirement
of one of the owners. If the owners choose to continue
the business, who would purchase and pay for the share
of departing owner’s interest. An entrepreneur must
also determine who intends to the purchase departing
partner’s interest, e.g., business assets, loans,
or life insurance policies. It requires determining
if the agreement applies to current owners or if it
also applies to anyone who joins the company. Finally,
it requires resolving if owners need to include covenants
not to compete, assignment of rights clauses, or indemnification
rights.
A number of other issues are involved in a typical
sale including tax consequences, intellectual property
rights, warranties, licensing rights, employment agreements,
and compliance with various laws, such as the Bulk
Sales Act
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