Source: So you have decided you want to be your own boss. Maybe you are in a position to finally start your own business that you’ve always dreamed of? So where do you begin? Samuel K. Burlum explores what it takes to begin your own business venture.
So you want to own your own business. Before you can determine the path in which your entrepreneurship career will be headed, you may want to take a moment to explore all of your options and review some of the hard facts about becoming an entrepreneur in today’s economic and technology climate. There are a number of types of businesses that you can choose from, spanning thousands of product and/or service categories and industries.
The most common business is a sole proprietorship. This type of business is more localized and usually operated by the owner. In a sole proprietorship, one person is responsible for all of the decisions, operations, sales and marketing, and advertising. The advantage of this kind of business is that the owner is in complete control of what kinds of products and/or services are offered, the hours of operation, who to hire/fire, and the success and/or failure of that said business. In some cases, a sole proprietorship is passed down from generation to generation. Commonly found examples of a sole proprietorship could be a locally owned barber shop or hair salon, a cafe, deli, or restaurant, an automotive repair shop, a single doctor’s practice, a certified public accountant practice, a single lawyer practice, or local hardware store.
The downside of having a sole proprietorship is that you are responsible for everything. Even if you do not have all of the acquired skill sets in every area of business, you must step up and handle each of these situations. They are part of the operations; no matter the type of product or service being offered. For instance, if you are very good at marketing but not very skilled at bookkeeping, you are still responsible for having the knowledge to be able to do your own accounting. In situations where you might be very good at one area of your business, but lack the skill sets in other areas, you have a few options.
Some folks that choose to start their own business, but don’t want to start from scratch, may choose to buy a franchise, keeping it to a specific area of product or service offering. The upside of a franchise is that a sole proprietor usually gets corporate support, branding, marketing, and advertising support, as well as a working model on how the franchise must function. Franchises are in essence a ready-made business. Most franchises require a substantial monetary investment up-front, requiring a sole proprietor to adhere to all of the terms and conditions of the franchise agreement. Limitations to a franchise are that the owner-operator of the franchise location cannot change the corporate model. They have very little or no control over the cost of goods sold, pricing, advertising, store location design and appearance. When owning a franchise, the owner-operator has very limited or little way of adding in their own creative input or creative control into their local business and cannot change the corporate model.
Advantages to a franchise is that most of the difficult guess work is eliminated from the equation as it relates to product development and product offerings, branding and marketing, advertising, product/service pricing, business model, and even employee hiring and training programs. Franchise models have the buying power of media buying and launching national advertising campaigns, aimed at driving potential customers to the door of local stores. Most franchises have major brand recognition, where consumers immediately recognize the product and services offered.
An alternative to a franchise is a cooperative membership model. Co-operative membership business models are popular in the industry segments of grocery stores, pharmacies, hardware stores, auto part stores, and other regional variety stores. Some of the most well recognized co-op brands include Hardware Hank, Ace Hardware, True Value, NAPA Auto Parts, and IGA. The co-operative business model consists of many independently owned stores by individual sole proprietors that pay a fee to use the headlined branding, and also agree to only buy all of their goods from the warehouse that supports that specific brand. For instance, a Hardware Hank hardware store is independently owned, however, has an agreement to purchase the inventory it desires to sell only from the warehouse that supports that brand. In the case of Hardware Hank, they must purchase their inventory from United Hardware.
A co-operative model allows for the independent sole proprietors to have more control over their own stores, with the support of name recognition of a national brand. Part of the fees and costs paid by the store owner to their co-operative provider assist in regional and/or national advertising campaigns, product development and introduction, and supports the central distribution center. In a co-operative business model, the members each have a vote or can cast a suggestion in how to improve the overall co-operative central focus. In essence, every co-op member is an owner in the corporate side of the business. Store owners still have the freedom to market to their local community, while rules and regulations on how to operate their individual store are not as rigid as a franchise.
Maybe you and a friend or a family member both have something equally important to contribute to a business enterprise, and decide it would be advantageous to team up with this person to start a business. This type of business is a partnership. More sophisticated types of partnerships are limited liability partnerships. A partnership can have one or more partners that have agreed to either contribute money, time, property, and/or labor, singularly or in a combination of any of these areas equally or in part. One of the keys to a successful working partnership is to have a very strong operating agreement in place that is signed by all of the partners, so that each person is aware of how the business should function, how decisions are made, how to resolve a dispute among partners, and how to distribute profits/losses to the members of the business.
Each partnership is different. In some situations, each partner may have an ability to contribute a greater amount of resource than the other partner. Some partnerships have a model that one can mimic, such as the model used for vetting partners in a law firm or doctor’s practice. As the saying also goes, be careful who you choose to partner with. Two people that may have the same passion for the same type of business in the same industry may not always be the best fit. Differences in opinion on how money should be treated, how people should be paid, where a business focuses its growth on, what products and/or services are offered, and even a difference in core values can either keep a partnership working or split it apart. Before you decide to enter a partnership, make sure that both parties have a clear understanding of the rules of engagement, expectations, and commitments.
A corporation is reserved for the career entrepreneur. A sole proprietorship becomes a corporation when the individual’s idea is widely expanded from the local market and offered to a national or worldwide market. The sole proprietorship has outgrown its local market, and now employs a large number of employees, and has a deep infrastructure in place to support larger business enterprise orders. This type of company may also offer multiple products and services to the general consumer, wholesale market, other commercial and industrial businesses and clients.
A corporation may have multiple investors who all have an ownership stake, known as shareholders. A corporation usually has a board of directors, with a company structure that includes executives, management, employees, vendors, suppliers, as well as outside third party professionals and consultants. When it comes to reporting requirements, a corporation has different legal protections and responsibilities than a sole proprietorship does. Tax treatment is also handled differently depending on the type of corporation structure.
There are two types of corporations: “S” corporations and “C” corporations. The major differences between these two types of corporate structures are in the areas of ownership, shareholder rights, and taxation. An “S” corporation can have no more than 100 shareholders, have only one type of share category, and in tax treatment are another form of a pass through. This means that profits and/or loss liabilities are passed to the owners/founders. “C” corporations have the ability to have different stock categories; voting rights can be segmented out differently based a series of financial contribution or management factors, and profits/dividends have two tax treatments. First, the corporation is taxed on gross revenue and profits, then each shareholder is taxed on the dividend they receive from the company as a result of their return on their risk.
A simpler version of a corporation is the Limited Liability Company (LLC). An LLC will allow for a sole proprietor or group of partners many of the same legal protections that can be found associated with a corporation. However, the major differences are tax treatment and ownership structure. LLC’s cannot sell shares, and protections afforded to a LLC can be revoked and the liability forwarded to the owner(s) if the business does not stay within compliance.
It is always better to get an expert opinion from a professional before you decide on the direction of your business structure. Many factors have to be considered before making a final decision, including such as the type of business, what products and services you plan to offer, the audience of consumer you plan to offer your product/service to; how big or small you wish to grow your business, and how much of your finances you will be putting at risk. The SBA offers many resources on their website as does the United States Department of Commerce regarding how to start a business. You can also engage the services of a business consultant to conduct research on your behalf and provide you options that best fit your entrepreneurial vision.