Section 1: Starting a Small Business

The Advantages of Partnerships

Advantages of forming a partnership include the following:

• two or more people can usually access funding more easily than one person

• two or more owners are apt to possess more know-how and more experience than just one individual

• and the financial loss due to failure is divided among the partners

The Disadvantages of Partnerships

Partnerships may run into serious problems if the partners are not in tune with one another. Incompatibilities can lead to quarreling or avoidance, and weaken communication lines and trust. At times, one of the partners may not carry his or her share of the workload, which increases tension. Also, one partner may make a rash decision without consulting the other partner(s) and may unwisely spend the company's money. Partners may be in disagreement over a variety of issues, which can eventually destroy the business and cause the partnership to dissolve. The most dangerous thing about a partnership is probably the fact that each partner is responsible for the actions of the other(s) in regard to business-related matters.

Another disadvantage of partnerships is that profits must be shared and active partners have unlimited liability to pay business debts. No matter how partners share their profits, each partner is 100 percent liable for the debts of the business.

Corporations

When large amounts of capital are required to start and/or operate a business, it usually takes more than three or four people to supply the necessary funds. Forming a corporation, which may have any number of owners, often solves such money-raising challenges. Individuals who want to invest in the company purchase shares of stock; in doing so they become owners of the corporation. Normally, shareholders invest in a corporation because they have the potential of benefiting from the company's success  — either in the form of dividends  declared by the company, or through the increased value of the shares on the stock market.

The shareholders select a board of directors who control the management of the corporation. As a general rule, directors hold office for one year. These directors plan and set policies upon which the business operates. They also select its officers. Most corporations have at least three officers: a president, a secretary, and a treasurer. The officers are responsible for actually running the corporation, and they are free to hire the people needed to manage and work in the various departments.

Individual shareholders rarely participate in daily decision-making unless they own a majority of the shares. In a corporation, power is derived from the size of a shareholder's holdings. One vote per share enables individuals who hold a large block of shares in the company to influence management decisions. Normally, if the shareholders become dissatisfied with the management of the company, their remedy is to elect a new set of directors at the next annual meeting.