The Complete Partnership Book - Softcover

Edward A. Haman received his law degree from the University of Toledo. He has practiced law in Florida, Michigan and Hawaii, and he has served as a Michigan Circuit Court domestic relations hearing officer. He has written many self-help books, including How to File Your Own Bankruptcy (or How to Avoid It) and Power of Attorney Handbook.

What Kind of Business Organization Works Best for You?

Excerpted from Complete Partnership Book by Edward A. Haman ©2004

First, take another look at the advantages and disadvantages of the various types of business organizations.

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Type of Organization Limited Liability Double Taxation Government
Regulation
Sole Proprietorship No No Minimal
Partnership No No Minimal
Limited Partnership For limited partners No Moderate
Corporation Yes Maybe Heavy
Limited Liability Company Yes Maybe Varies by state

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How do you sort through all of this to determine which is best for your situation? If you have a lot of personal assets that you do not want to risk losing, you should probably incorporate. This is especially true if you will be engaging in a business that is more likely than others to subject you to lawsuits (such as a fireworks display business). It will be worth the extra taxes, expenses, government intervention, and paperwork hassle to protect your assets. On the other hand, if you are starting your business on a shoestring budget and do not have a lot of assets to protect, a sole proprietorship is probably the best choice.

A sole proprietorship is usually preferable to a partnership. A partnership should usually be your last choice. It seems to be human nature for partners to argue, whether they are partners in business or partners in marriage. Partnerships, like borrowing money, have destroyed countless friendships.

Generally, you should only take on a partner if you absolutely need that person's money or expertise. First, you may want to see if you can get the money as a loan or hire the person as an employee or consultant to get the expertise. This way you will not be giving up control of your business. A partnership is essentially a business run by a democracy.

Before you commit yourself to taking on a partner, consider what may happen if you disagree. There will be times when a decision must be made that will determine the success or failure of your business. What are you going to do when you and your partner disagree on this decision?

Example: Suppose that about a year after you start your business, the nation's economy goes into recession. Your income drops drastically. You decide that it is necessary to increase spending on advertising in order to reach the customers that are still in a buying mood (this is a commonly accepted and recommended course of action in the business world). Your partner insists that you must cut spending in all areas, especially advertising. What will you do?

If you decide to take on a partner, it is important to choose your partner carefully
and to prepare a good Partnership Agreement. This can help reduce friction between the partners by clearly defining what each partner's role is in operating the business. One of the most vital parts of the agreement is to agree on how to settle disagreements. However, no Partnership Agreement can totally prevent friction between partners. This is why it is important to choose the right partner and to consider such things as your respective personalities, comfort with risk, goals, philosophy of life, etc.

Example: If you are a workaholic and your partner does not believe in working weekends, you may begin to feel that you are doing all of the work. You may become resentful of your partner.