What are the nine general factors an entrepreneur should consider when choosing the form of small business ownership?

Answer 1

The following are a few considerations that every entrepreneur should review before choosing the form of ownership.

Tax considerations: Because of the graduated tax rates under each form of ownership, constant changes to the tax code, and year to year fluctuations in a company's income, an entrepreneur should calculate the firm's tax bill under each ownership each year.

Liability exposure: Certain form of ownership offer business owners greater protection from personal liability due to financial problems, faulty products, and a host of other difficulties. Entrepreneurs must weigh the potential for legal and financial liabilities for their company's obligations.

Start-up and future capital requirements: Forms of ownership differ in their ability to raise start-up capital. Depending on how much capital an entrepreneur needs and where she plans to get it, some forms are better than others. Also, as a business grows, its capital requirements increase, and some forms of ownership make it easier to attract financing from outsiders.

Control: By choosing certain forms of ownership, an entrepreneur automatically gives up some control over the business. Entrepreneurs must decide early on how much control they are willing to sacrifice in exchange for help from other people in building a successful business.

Managerial ability: Entrepreneurs must assess their own ability to manage their companies. If they lack skills or experience in certain areas, they may need to select a form of ownership that allows them to bring the company people who possess those skills and experience.

Business goals: How big and how profitable an entrepreneur plans for the business to become will influence the form of ownership chosen. Business often switch forms of ownership as they grow, but moving from some formats to others can be extremely complex and expensive. For instance, business owners wanting to switch from a corporation to a limited liability company face daunting liabilities under current tax laws. That conversion gets taxed as though the entire company was liquidated or sold off.

Cost of formation: Some forms of ownership are much more costly and involved to create than others. Entrepreneurs must weigh carefully the benefits and the costs of the particular form they choose, bearing in mind the financial implications of each.

Management Succession: When choosing a form of ownership, business owners must look ahead to the day when they will pass their ventures on to the next generation or to a buyer. Some forms of ownership make this transition much smoother than others.