Entrepreneurs embark on costly business ventures without first looking into the form of business that would be most suitable for them given their business experience and financial capability. Deciding on what legal form your venture is going to take will spell the difference when you experience difficulty in your business later on.
A businessman can choose from different business forms including sole or single proprietorship, partnership or a corporation. Each of these legal forms has their own advantages and disadvantages and a businessman should be well aware of their implications on his business venture.
Sole proprietorship is the easiest business venture to put up because you only have yourself to disagree with. This means you can go ahead with whatever plans you have and you can implement them anytime. It means that when your venture succeeds then you will reap all the financial rewards of your business. The sad fact is that this can also be a disadvantage since it can also mean that you will shoulder all the losses if the business fails.
A partnership will do well for business ventures that require more capital and more skills and expertise. You and your partner can concentrate on the different aspects of the business depending on your skills and talents. A partnership form of business means both you and your partner get to share your financial earnings and losses. However, there could be a problem if the business acquires debts because your creditors can run even after your personal money and not just after the capital infused into the business.
The most ideal, although complicated, type of doing business is the corporation. Incorporating your business would mean bringing in other people to the business. This would mean no decision can be reached without the agreement of the majority of the Board of Directors. The good thing about a corporation is the availability of vast financial resources for the business.
A corporation is a distinct legal entity from its incorporators and shareholders so that in case the business incurs debts, the share or stockholders will only answer for the debts depending on the shares they have in the corporation. This is called the theory of limited liability. The creditors will no longer have any right to seek payment from the personal finances of the stockholders.
A business can start as a sole proprietorship but the owner can chose to incorporate the business later as it grows. True, there are more documentation requirements for incorporating a business but the advantages of incorporating a business far outweigh the disadvantages.