HOW WILL MY BUSINESS BE ORGANIZED?
Up to now, I have used
a very broad brush to paint my business
picture. I have not
determined if I am to start the business from
scratch, buy an
existing business or buy a franchise; will my
business be a
sole ownership, a partnership or an incorporated
Before I make a
decision, I must find out what each alternative
starting a business implies? What are the advantages or
drawbacks for each type of business? I must also decide if, at
first, I should incorporate or not?
1. What method of starting a business should I choose?
start from zero?
buy an existing business?
buy a franchise?
To choose wisely, I
will have to consider the advantages and
drawbacks of each
method and then decide which way suits me,
considering only my particular or personal
a) Should I start my
business from scratch?
- It will cost me less to start from nothing.
- I can decide how fast I want to go, how fast I want to
develop my business, I am more in control.
- I can choose where the business will be
- I can reinvest my first profits in my
business, instead of repaying outside debtors.
I may have to be patient at first, start-up is usually
- I may have trouble finding financing, as lenders, such as
banks, will be reluctant to deal with a business they
- If I do find a
lender, I may have difficulty in protecting
my personal assets from seizure in case of
- At the beginning, I will face risks and uncertainties,
which might include no credit, erratic sales, little or no
cash flow, difficulty with deliveries, etc. However, if I
persist, these drawbacks will disappear, when I prove the
viability of my business as well as my
determination to succeed.
My next step, before I make any decision, is to consider the purchase of an
b) Should I buy an existing business?
From an existing, functioning business I will get an
immediate cash flow.
- Past performance of the existing business makes it easier
to forecast my future sales and profits.
- Business relationships are already established with
customers and suppliers.
- Lines of credit, loans can
be much easier to get with an
- It is easier to shelter my
personal assets from failure
with an existing, proven
business, because the business
itself may offer
enough of a guaranty to lenders.
- I may have to pay
more for an existing business than what
I would like, because of
such things as goodwill, older
in the sale, etc.
- I am locked into a site for my business.
- I acquire a name and
reputation that will be difficult to
- Once the transaction is
completed, I may find part of the inventory to be obsolete.
- I must be aware that the
"clientele" I am supposed to buy
(usually termed as goodwill)
may or may not be loyal to me,
as the new owner.
If I decide to buy a business, to make sure I get what I
for, and, that I do not get into contractual agreements
without knowing what I am doing, I will consult a
professional to find out:
- Why is this business for sale?
- How much is the business really worth compared to the
- Are there any legal or contractual obligations involved in
buying this business (titles to property, loan or mortgage agreements,
contracts of any kind, other legal or financial
implications) that I should be aware of
and understand, before I decide to purchase this business and,
before I sign any agreement.
Next, I will consider the purchase of a franchise as
method of starting my business.
c) Should I buy a franchise?
There is already an established reputation with clients.
The product or service is already known, goodwill exists.
- I acquire the right
to use a name or trade mark already
known in the market.
- As part of the price, I have access to know-how in
management, production techniques, cost control, publicity,
and other knowledge I can use to successfully run a
- Sometimes I may
have access to financing through the
I will have a limited
scope of action. The franchising
agreement spells out
very strict rules and penalties for
- The initial purchase
price of a franchise can be quite
- The ongoing royalties
I must pay for doing business under
a franchising agreement can also be quite
- The franchising agreement can limit prices, sales, the
number and type of products I can sell, where I can buy my
supplies, the type of accounting and
controls I must use, opening and closing hours, days, what type of
containers or uniforms I can use and where I must buy them, etc.
In buying a franchise,
like buying a business, I will need
the advice and
guidance of a professional on my side. It is
most important that I understand exactly
what my rights and obligations are under
the franchising contract. To do this,
I must have someone competent to explain
the terms used in the agreement.
2. What legal form will I choose for my business? To choose wisely,
I must first outline the choices I have, describe what
these choices mean to me and my business and make my choice
according to what suits me and helps me reach my goals.
There are three basic choices
in front of me, they are sole
partnership and incorporation.
a) Sole ownership through
This consists of registering my business with the Court and
declaring my ownership, the name of my business and the address
where the business will operate from.
- It costs very little to register a business.
- It declares to anyone interested that I am in business.
- I am personally liable for all debts or liabilities of
- I cannot shelter my personal assets from my personal or
- Banks or other lenders are reluctant to lend money or
extend a line of credit to registered entrepreneurs.
- There are more persons to share the risks.
- There are more persons to invest in the business.
- Lenders will extend credit more readily to a
- There will be more talent in a partnership and
tasks can be
- All partners are equally and severally responsible for
business debts and liabilities.
- Unless a partnership
agreement has been signed between the
partners, if one or several partners should want to withdraw, the
partnership is automatically dissolved. The dissolution of a partnership can
be very messy.
- Individuals cannot shelter
their individual assets, unless
the agreement of
partnership stipulates a limited
where some or all the partners limit their participation and risk.
Before going any further,
here is a list of information I
must have, before I enter
into a partnership agreement with
The financial situation
of my partners to be. What do I
know of their
honesty? How about their emotional
stability, do they
panic? Do they get along well with
people, do they get
along with me? What kind of
personality does each have? Are
they compatible with
each other, with me? What kind of
experience does each
have? To what extent will it benefit the business? Is
there too much of one type of experience among them?
Their capacities? Are they proven or are they all
novices? Are they willing to share the responsibilities
of running the business or part of it? When I submitted
my ideas for this business, who was enthusiastic and who
was lukewarm or negative? Who offered positive
suggestions or criticisms? Finally, am I in a position
to pick and choose my business partners? Can I look
At this point, I should
consult my lawyer, to have him draw
up a partnership agreement,
stating all the items I want covered in it. Once I have a copy, I will
convene all my potential partners and submit the agreement for their
approval and critique, then with their consent, I will
have the final
agreement drawn up for their signatures. We will
also decide when we will sign the agreement.
c) A limited corporation
A limited corporation is a
legal entity, a legal person,
and, as such, is responsible
directly for it's business
debts and liabilities.
- Shareholders in a
corporation limit their risk to the
amount of money they have
invested in the shares of the
shareholder owns one or more shares of the corporation.
- A shareholder can shelter
his personal assets from the
business' creditors. His
liability is limited to the number
of shares he
- Banks and lenders
will loan money more readily to a
corporation, because it has assets of it's
- If a shareholder were to
die or quit, it is much more
simple to value his shares
and buy his estate out. The
corporation is not
dissolved when a shareholder leaves.
The cost of incorporating a business is more expensive than
the other alternatives.
- In a small
corporation, with few assets, a bank or lender
might ask for
additional guaranties through the personal
assets of the shareholders, before lending
Corporations are more highly government regulated
Here again, my lawyer will
guide me, when I choose to
incorporate my business. He
will make me aware of my rights
and duties under
the laws governing corporations. I will also
consult my accountant to set up the
accounting books, to learn about
corporate tax benefits and to follow his advice on financial and tax
matters. Once I have made my choice, I
will have the necessary papers drawn up
and will technically be in business. I may now turn my attention to the more practical
aspects of running my business.