Before establishing a business, every entrepreneur needs to answer these five questions.
1. Who will be in charge of the business?
In this category, it matters how many people run a business and how involved they are. The more people in charge of the business, the more important organizational considerations should be taken into account.
Since the owner and manager share the same interests, a sole proprietorship is the best legal structure for a business run by just one person.
When more than one person runs a business, different problems arise. Conflicts among principles, the death or disability of one or more principles, the sale of all or part of a share, rights of first refusal, and so forth, are just a few examples. Additionally, a single attorney may represent multiple parties.
2. Do I intend to expend more money in the future?
Are you planning to invite additional guests? Will these individuals be limited partners or equal partners? How much capital and/or real estate did you put into the business? Do you want complete control over the business? When starting a business, all of these questions are skipped over. When the business begins to expand, all of these questions begin to have an impact. Depending on the responses, a general partnership, limited partnership, or corporate structure may be considered.
How quickly will the company expand? Limited liability structures should be given more consideration as growth slows. The corporation should be the primary consideration when anticipating rapid growth. Why? Investors are drawn to rapidly expanding businesses because it is much simpler for them to deal with corporate structures.
3. Do I want to shoulder personal responsibility for the company’s debts?
To put it another way, asset protection should be a priority and something to consider in advance. The primary concern in this instance is whether the business faces additional liability risks. If these risks are high, a sole proprietorship or general partnership should be avoided in favor of limited liability entities like an LLC or corporation (S or C) instead.
4. Who will put money into the business?
Because investments made by third parties or other entities make the management and operation structure more complicated, this consideration is also crucial. In addition, one should anticipate future investments coming from outside parties or from the current owner. In contrast to businesses started by individuals who are not related to one another, family-owned businesses are less likely to attract outside investments.
Also, think about taking out loans in the future. A major factor is the issue of guarantees and liabilities. Personal guarantees and liabilities will change based on a company’s structure.
5. Do I want the standard statutory law to be used?
The so-called fiduciary duty and duty of loyalty are the subjects of this question. Owners, co-owners, managers, and shareholders may share these responsibilities in various combinations. The right to speak up and equality of rights in company management are also impacted by the scope of these responsibilities. Your opinions on this matter ought to be known to your attorney.