Operating costs and future sales may be difficult to predict because there is no history to rely on since the business is not established. The single biggest disadvantage of starting a new business is the unknown. There are many rules, regulations, statutes and taxes that the owner may not be aware of at the time the business is opened. A new business owner may have a product that is not very marketable, or not marketable in the area they picked. There are a lot of risks in establishing a new business, so it is important that thorough research is done before the business is opened.
Buying an Existing Business
There are many benefits to buying an existing business. Start-up time and costs would be less; you may be able to work out an agreement with the seller to purchase the existing equipment and stock. The existing employees may also come with the purchase of the business so that you don't have to look for new employees. It may be easier to get credit to purchase the business, especially if previous years financial statements showed endurance and profit.
There are also negative sides to buying an existing business. Purchasing the business could also mean that you are acquiring liabilities or law suits that my have been incurred while the previous owner was in charge of the business. If a customer had a prior negative experience, they might still not let that experience go despite the fact that the business is now under new management. Once customers get a bad taste in their mouth, it can be nearly impossible to get them back. It is very important that you have a lawyer involved and that all aspects of the business are researched to make sure that this is the right decision for you.
Contracting for a franchise outlet franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser's quality standards. (U.S. Small Business Administration, 2007). A benefit to opening a franchise is that many of the details are decided, so it leaves the entrepreneur with less detail to worry about. Typically with a franchise, the operation resembles that of a large chain with trademarks, uniforms, symbols, equipment storefronts and standardized services or products and maintains uniformed practices as outlined in the franchise agreement. In a franchise, an individual franchisee does not handle the large scale marketing campaigning and they have the franchiser working on the marketing plans and analysis.
Business Legal Structures
One of the most basic and most important decisions for an entrepreneur to choose is the legal structure of the business. The entrepreneur should investigate all the advantages and disadvantages of each form of ownership, including the tax laws and liabilities involved. Legal business structures fall into three categories. These include, sole proprietorship, partnership and corporations.
The individual owner of an unincorporated business operates the business as an extension of himself. The profits and losses of the business are reported on the tax return of the owner - there is no separate business filing. The owner is personally responsible for any liabilities of the business. If someone sues the business for breach of contract, personal injury, or to collect a debt, the court can directly levy the personal bank account and other property of the owner. The major advantage of sole proprietorship is that it is the simplest and least expensive structure, as there is really nothing to set up and maintain, except perhaps the business name.
General Partnership - Two or more people own the business jointly and share profits and losses of the business as spelled out in the partnership agreement. Each partner is potentially responsible for the full amount of all liabilities of the business, i.e., a creditor can collect the full amount of a debt of the partnership from the partner that is the easiest to collect from. Distribution of profits and losses is determined by the partnership agreement and passes through to the individual partners. It does not have to match the ownership percentages. The partnership itself is not subject to any income or franchise tax. Control of the business is determined by the partnership agreement, but unless stated otherwise, the partners control the business jointly, with each partner having an equal vote. An advantage of partnerships is that, like a sole proprietorship, no state filings are required to create the business entity, nor are there any ongoing reporting requirements.
Limited Partnership - the basic structure and tax implications are the same as for a general partnership, but the limited partnership allows for one or more limited partners, or "silent partners," to own a portion of the business, but not participate in the management of the business. The partnership must also have a general partner who has personal liability for all liabilities of the partnership. This structure allows a partnership to have outside investors without subjecting them to the liabilities of the business.
Limited Liability Partnership (LLP) - the LLP is a fairly new structure that appeared as a result from demand from attorney and accounting firms to be able to limit the liability between partners (attorney and accounting firms were at one time not allowed to incorporate, though they are now). An LLP is taxed like a partnership, but limits the liabilities of all partners much like an LLC. However, at this point in time, LLP laws vary significantly from state to state. For example, California and New York only allow this form for attorney and accounting firms. In many other states, partners in an LLP only have a limited shield, and are not afforded the same protection they would enjoy in an LLC or corporation. These restrictions make the LLP generally only a good choice for attorney and accounting firms, at least in the states with the limited shield law.
Corporation (a C Corporation) - a c corporation is owned by one or more stockholders, managed by a board of directors elected by the stockholders, and run day-to-day by officers appointed by the board of directors. A single individual can be the sole stockholder, director and officer of the company. The stockholders, directors and officers of the company are protected from the liabilities of the company, including liabilities for their own negligence when acting in their corporate role, except in certain extraordinary circumstances. In an ordinary corporation (a "C Corporation") the profits and losses of the corporation are not passed through to the tax returns of the owners. The corporation files its own tax return and pays its own taxes. It may also be subject to state franchise taxes or other annual fees.
Corporation - After the corporation has been formed, the stockholders may elect's Corporation" status by making a filing with the IRS. An S Corporation is taxed like a partnership and the profits and losses of S Corporations flow through to the federal tax returns of the owners in proportion to their stock ownership. They are protected from the liabilities of the business as in a C Corporation. The S-corporation structure is generally preferred over a standard corporation when most of the shareholders are employed by the corporation or otherwise involved in its day-to-day activities, and the corporation distributes most of its income to its shareholders each year.
Limited Liability Company (LLC) - an LLC is a hybrid of a corporation and a partnership and is rapidly becoming the most popular structure for small businesses due to its flexibility and its low cost to create and maintain, while still offering most of the advantages of a corporation. The ownership percentages, profit and loss distributions, and voting powers of each member are determined by the LLC Articles of Organization, rather than by stock ownership.
An LLC can choose to be taxed like a partnership or S Corporation with profits and losses flowing through to the owners' tax returns, or taxed like a C Corporation, filing its own return. The owners and any officers and directors are protected from the liabilities of the company, as in a corporation. An LLC is generally subject to franchise tax, though this varies from state to state.
There are many choices and many factors to consider - there is no "one right answer." Many of the advantages of incorporating can be gained in other ways for sole proprietors, such as purchasing liability insurance. Also, the paper legalities are often outweighed by the real-world practicalities. For example, while a corporation may shield the owners from personal liability for debts, in the first 2-3 years in business, it's unlikely…