This article first appeared on June 25, 2012 in a classroom discussion for Accounting 201. The prompt was: “Up to this point, we have discussed sole proprietorship and partnership business structures. We are now going to look at the corporation business structure. Discuss the differences and advantages/disadvantages of the different business structures when compared to the corporation. Sharing of news articles is also acceptable if you cite your source.”
First of all, I received this article in my Entrepreneur newsletter just this morning: Bringing on a Business Partner? Avoid This Common Mistake. It discusses the legal ramifications of bringing on a partner to your business.
As far as advantages and disadvantages go, the two easy ones are “liability” and “ease of formation.” However, let me touch on “ease of formation” a bit.
In business, all decisions should keep long-term planning in mind. One thing the article above also discusses is that while services like MyCorporation.com and LegalZoom may seem like a cheap and easy way to get legal documentation out of the way, it actually may end up costing more later down the line. In today’s world, any successful business is going to face a lawsuit or legal dilemma at some point… it’s not an “if” but a “when.”
“Ease of formation” is often an advantage attributed to sole proprietorships and general partnerships. I disagree. There is no business, but rather individuals in these arenas. There is no formation of a structured business, and so it easily collapses when determining liability, profits, and debt. Things get complicated and expensive rather quickly. To say they are easy to form is like saying it is easy to watch television. It’s not easy, it’s lazy.
Actually, what is easy is outsourcing to an accountant and attorney to make sure that all bases are legally covered. The peace of mind is ever-present, but the entrepreneur can focus on the business of business rather than spending too much time covering his/her behind.
So if that’s the case, why do they tell business majors to take accounting? Because at the end of the day, the owner of the business is held responsible for the finances and held responsible for legal affairs. We must know all the ins-and-outs in order to double and triple check what our accountant puts together.
Moral of the story: study hard in accounting and business law classes, but still hire an accountant and an attorney before doing business. Oh, and take the time to form a LLC, S-Corp, or C-Corp, or the on-the-rise B-Corp. Don’t be lazy.