5. Choosing A Business Structure
There are three basic forms that you may choose to commence business under:
(a) Sole proprietorship
(b) Partnership
(c) Corporation
5.1 Sole proprietorship
Under a sole proprietorship, a business is owned by one person. The owner may employ other people but has sole personal legal obligation for all the activities, or, “unlimited liability.”
The advantage of being a sole proprietor is that such a business is simpler to set up than a corporation. A one-person operation also makes for speedier decision-making, and it is easier to keep financial and technical matters confidential. As well, it is easier to diversify or close the business.
The disadvantages of having a sole proprietorship are that it may prove too limiting a structure as the business grows beyond the abilities of a sole owner or operator, there may be higher tax implications, and it may be difficult to obtain financing. Personal liability also makes such a business a greater risk.
5.2 Partnership
A partnership is a business jointly owned by two or more persons. In a general partnership, all partners are personally liable for all obligations of the company. A limited partnership, however, is liable only up to the amount of equity invested.
For the home cleaning business, the advantage of having a partnership is that the energies of two people enhance the business, since partners can share strengths and counter weaknesses. There is also generally a better credit risk in the case of financing.
The disadvantage of a partnership is that personality clashes may occur, causing disruptions. It may also be difficult to sell or transfer ownership in the business.
5.3 Corporation
A corporation is a business entity which acts as a separate and legal person, owing to legal setup. Generally, private investors (shareholders) have less exposure to liability since any risk is limited to what they have invested.
For a home cleaning business, the advantage of this structure is that it has the ability to raise capital or bank support for large projects. There can also be tax advantages, and principals generally are exposed to the limit of their investment in the case of business failure.
The disadvantage is that incorporation fees are expensive, and it is necessary to have professional tax planning advice to maximize any corporate tax breaks. As well, annual reports are required, and information is available to the general public, which is not always desirable.
Your decision about which legal structure to adopt should be based on the following considerations:
• How much and what kind of financing is required?
• What is the degree of technical skill required to run the business?
• Is there a need for outside expertise?
• Is there a need to separate business and personal life?
• Is there a need to protect business and personal assets?
• Will there be a need to sell stock or shares in the company?
• What structure feels best to you?
6. Professional Services: Your Lawyer And Your Accountant
The time will come when your business needs the advice of an accountant or a lawyer. A lawyer is invaluable if you are sued, need advice on business law, have to sign a contract, or want to enter into a partnership agreement. A good accountant will make sure your business can take advantage of favorable tax laws and comply with all other requirements for reporting income.
Finding the right person is important; the best way to find a good lawyer or accountant is through referrals. Ask your friends who are in business who they use and if they are pleased with the services provided. Your banker is also a good person to ask for a recommendation.
Once you have selected your lawyer, take steps to keep legal costs in line. Lawyers bill for their time, so write down your questions before you meet with your lawyer. Don’t call without a reason and don’t ramble on about the weather. It pays to be organized; always have the right documents at hand.
Prepare a list of questions. For instance, you’ll want to know the following:
(a) Do you have previous experience in advising a small business?
(b) Are you familiar with this industry?
(c) In the case of litigation or tax problems, what is your success ratio?
(d) What is your availability for me and my business?
(e) What is your fee and what are your billing terms?
(f) Where do you obtain your current sources of information?
(g) Do you offer information seminars?
These are just a few of the questions you may want to ask. Do not take up too much of the person’s time. Get a feeling for the person. Did he or she treat you well? Did you understand each other? Did he or she communicate in plain language or were you baffled by technical terms? Did he or she seem genuinely interested in having you as a client? These relationships are very important for you so choose well at the onset before any problems arise.
You may need both an accountant and a bookkeeper. An accountant is a certified professional who prepares financial statements and tax returns and can also set up a bookkeeping system, prepare budgets, and provide general advice on all expenditures. If you need tax advice, go to your accountant.
A good bookkeeper, though experienced, does not have the same level of knowledge and training that an accountant does. Keeping the books means keeping track of sales and expenditures and entering them in a ledger. You can and should do your own bookkeeping in the early stages of your business. This way, you learn the numbers that make your business tick. For further discussion about bookkeeping, see Bookkeepers’ Boot Camp, another title in the Self-Counsel Business Series.
7. Purchasing An Existing Business Or Franchise?
Purchasing an existing cleaning business or joining a franchised cleaning business are attractive options. However, before you go ahead, make sure that you do all the research and development that you would do if you were about to commence your own business. Do not take the word of a vendor that all is well. Ask to see the books and records for the business but don’t base your decision solely on finances. Make sure that you read and understand any contractual obligations you may have to make. Consult your lawyer and your accountant about all aspects of the business you intend to buy or the franchise in which you are interested.
In the case of a franchise, you are in essence renting the use of the name and systems of an organization. Is the success of the business directly attributed to an individual, or could it survive and continue to grow with you as the new owner/operator? Always ask if there is anything you could do to enhance operations (e.g., Spend more time in the business? Spend more money on marketing?). Ensure that the vendor will cooperate with you in a smooth transition of the business. Make an effort to observe staff in operation.
In the case of an existing business or a franchise, find out if there are any unresolved legal issues. If there are and you don’t find out about them beforehand, you could be adopting a giant legal mess. Keep your inquiries discreet and do nothing imprudent that would upset the business. The sale of a business is highly volatile. Clients who hear that the business is being sold could become upset about security issues and having strangers in their homes.