ISSUES IN SELECTING A BUSINESS FORM

Entrepreneur: Someone who initiates and assumes the financial risk of a new enterprise.

One or more entrepreneurs setting out to start a business should consider the following four factors when deciding what form of business to organize:

(1) ease and expense of creation,

(2) liability of the owner(s) for obligations of the entity,

(3) tax considerations, and

(4) the need and ability to raise capital.

TRADITIONAL BUSINESS FORMS

Sole Proprietorship: A business owned by a single person or family.

Partnership: An agreement by two or more persons to carry on, as co-owners, a business for profit.

Corporation: A legal entity formed in compliance with the statutory requirements of its state of incorporation, owned by shareholders whose liability is limited to their investment in the corporation, and managed by (i) a board of directors elected by the shareholders and (ii) officers employed by the board of directors.

SOLE PROPRIETORSHIP: PROS AND CONS

Advantages:

a proprietorship is easy and inexpensive to form;

the proprietor receives all of the profits;

the owner has the maximum degree of control over business decisions; and

the proprietor may establish a tax-exempt retirement account.

Disadvantages:

the proprietor has unlimited personal liability for any losses or liabilities incurred by the entity;

the entity will not survive the proprietor’s death, disability, or retirement; and

the proprietor may only raise capital for the business out of his personal funds and from loans others are willing to make based on his personal liability.

FRANCHISE RELATIONSHIPS

Franchise: A relationship where the owner of a trademark, trade name, or copyright (the franchisor) allows another person or entity (the franchisee) to use that trademark, trade name, or copyright, under