Choosing a business structure: proprietorship, partnership or corporation?

• Position: Indiana: small: business reference: guide

One of the first decisions you need to make when starting a business is what type of entity your new venture will be. There are advantages and disadvantages to each structure and it is important to consider how you expect your business to operate both now and in the future. The following structures are the most common.

Sole proprietorship

This is the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. There are likely to be fees to obtain business name registration, a fictitious name certificate and other necessary licenses. Attorney's fees for starting the business will be less than the other business forms because less preparation of documents is required and the owner has absolute authority over all business decisions.

Partnership

There are several types of partnerships. The two most common types are general and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Legal fees for drawing up a partnership agreement are higher than those for a sole proprietorship, but may be lower than incorporating. A partnership agreement could be helpful in solving any disputes. However, partners are responsible for the other partner's business actions, as well as their own. Identify the customer demand for your product/service.

A Partnership Agreement should include the following:

* Type of business.

* Amount of equity invested by each partner.

* Division of profit or loss.

* Partners compensation.

* Distribution of assets on dissolution.

* Duration of partnership.

* Provisions for...