Answered Essay: What 5 factors do we need to consider in order to choose the right form for our business?

What 5 factors do we need to consider in order to choose the right form for our business? Explain (list with explanation)

Expert Answer


Factors to consider in choosing the right form of business include:

  • Ability to Raise Capital: It is imperative for any business, how you raise capital is subject to significant regulation, depending on your chosen business entity. While Venture capitalists, angel investors and others may invest in your business. But your business proposition should be strong enough to persuade them to fund your idea. It should be profitable for them. Taxation rules are significantly different in different parts of the globe. Hence detail research should be done to find out about the taxation laws, in the place for the business. SEZ etc. provide better protection and hence should be on priority.
  • Separation of Ownership and Management: Personal liability is a huge concern for entrepreneurs. Several entities such as corporations, LLCs, and limited partnerships separate ownership from management and thus shield the business owner from suits brought against the business. Sole proprietorships and general partnerships, on the other hand, leave the owner vulnerable to being held personally responsible for their management decisions. The organizational hierarchy should also be decided for feasibility assessment.
  • Limited Liability Protection: It is essential that your personal assets remain shielded from potential business liabilities. This is often the principal reason for choosing to incorporate a business as a C Corporation, S Corporation, or LLC. Sole proprietorships and general partnerships do not offer this kind of asset protection.
  • Transfer of Ownership: Transferring ownership of a business is relatively simple in a C Corporation or an S Corporation, as that ownership is based wholly off of the shares held, the owner needs only to sell their stock to the new owner. Other business entities do not offer the same ease of transfer. Ease of transfer of ownership allows you for ease of smooth transition as you sell of your business or go for a merger or get acquired.
  • Ease of Formation: Sole proprietorships pose the least amount of difficulty to set up- requiring only that you register the business with the relevant agency in your state, county, and city. All other entities must be registered through the local Secretary of State, as well as adhere to a set of recordkeeping rules to retain limited liability protections. Maintaining these records and ensuring the business remains in good standing can be costly and time-consuming, but the protection from liability might just be priceless. Often you can go ahead with more than 2 members to start your organization because that distributes the responsibilities and the liabilities, associated. Acquiring the required resources and their availability in the vicinity is important in the long run to prevent high attrition rate.
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