The Pros And Cons Of Making A Proprietorship Or A Partnership

By:Trevor Marshall

If you are just getting your business off the ground, one of the more key issues will be your choice of a legal structure. If you aren't going to incorporate your business, you can choose between a sole proprietorship or a partnership. Which one is right for you will depend on your financial situation and how much freedom you want to have.

1. Sole Proprietorship

Advantages

- Takes only one person to run

- Simplest and least expensive business to form

- Few legal restrictions

- All profits (and losses) go to you

- Controlling decisions made by you.

Disadvantages

- Unlimited liability (may exceed your investment)

- Heavy responsibility

- Your knowledge alone drives the company forward

- Limited growth potential

2. Partnerships

Another legal basis for starting a business is the partnership. Keep in mind that partnerships can be between more than two people. Often partners have different skills, or one parner is financially supporting the business while the others do all the work.

Advantages

- Easy to form

- Shared responsibility

- Capital can be raised faster

Disadvantages

- Again, unlimited liability

- If the business goes down the tubes, so might your friendship

- More complicated about what to do when one or more partners wants to stop being a part of the business

3. Breaking Up Is Hard To Do

When a partnership ends, it can often be a source of great dispute between the partners. It is highly recommended that you use a shotgun clause. A shotgun clause is where, in the event that one of the two partners decides he wants to get out of the agreement, he can allow the other partner to offer an amount of money to buy out his half of the company. The clause then goes on to state that the partner can then fire right back at the other partner and buy out their half for the same amount. In other words, imagine two kids fighting over a pie. You tell the kids that either one of them can cut the pie into two pieces, but then the other kid gets to choose what piece he wants first. This ensures that if your business partner offers you a dollar for your half of the business, you can fire right back at him and buy his half out for a dollar. This ensures you get a reasonably fair price for your half of the business.

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