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The Pros and Cons of Different Business Ownerships: Prospective Entrepreneurs Should Consider Several Alternatives

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You have worked for a company for the past 10 years. During that time, you have developed a tremendous amount of business skills. You’re now skilled at selling products and services. You’ve proven to your bosses, and yourself, that you are skilled at managing and motivating employees. You’re also pretty good at formulating budgets and business plans.

You like your job, but you think that you are skilled enough to make a lot more money than you are currently earning. That’s not going to happen at the company you work for. Your bosses, the company’s owners, share in the profits — profits you are partly responsible for. Your salary is pretty high, but you don’t share in the profits, not directly anyway. You’re also very knowledgeable about the industry you have worked in during the past 10 years. You understand the current marketplace, the industry’s trends, and how a company in your industry is going to succeed in the future. You’re even confident about building a clientele that is larger than your company’s clientele.

In short, you think that you are ready to launch and manage a business. Are you? I can’t answer that question, but I can give you some tips on what kind of business to launch by summarizing the pros and cons of different kinds of businesses. Perhaps, you should start a sole proprietorship. Or a partnership. Or a home-based business. Or an online business. Below is a list of the pros and cons of these four kinds of businesses.

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Pros of A Sole Proprietorship:

* You’re THE boss. You make all the decisions, including how much of the profits go into your pocket. The sole proprietorship is the dream of millions of Americans. That’s why it is the most common form of business in the USA.

* A sole proprietorship is also the simplest form of business in the USA, reports The New York Times article “Advantages and Disadvantages of Sole Proprietorships.” The Entrepreneur magazine article “The Basics of Business Structure” explains the simplicity this way — “A sole proprietor need only register his or her name and secure local licenses, and the sole proprietorship is ready for business.”

* The owner can sell the business whenever he or she feels like. In other words, the sole proprietorship has the ability to make money quickly without relying on the approval of others.

* Filing taxes is a less cumbersome process. In fact, there are no business taxes and the proprietorship’s business income is part of his or her personal income tax payments.

Cons Of A Sole Proprietorship:

* The sole proprietor is personally liable for all of the proprietorship’s debts.

* The proprietor is also financially responsible for actions committed by his or her employees. In other words, a proprietor is responsible for the judgment of a lawsuit that was based on an employee’s action.

* It’s more difficult to raise money for the business. Investors generally aren’t interested in sole proprietorships, partly because by definition they can’t become part owners via an investment.

* You make all the decisions. Yes, that was also on the pro list, but for some people it’s a con.

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Pros of A Partnership:

* Partnerships are easy to form although Michael Spadaccini, the author of the Entrepreneur magazine article, advises all partners to make sure they have a written partnership agreement.

* Two or more partners who work well together can and often do make better decisions than a sole proprietor or even a corporation. The latter kind of business often has a bureaucratic decision making process or “too many cooks in the kitchen.”

* A low tax bill. Legally, partnerships don’t have to pay a minimum tax bill that larger businesses are required to pay, wrote Spadaccini.

Cons of A Partnership:
* Like sole proprietors — and unlike the managers of a corporation — the partners are personally responsible for the partnership’s debts, liabilities, and losses (although they’re shared, unlike the case with sole proprietorships). Spadaccini recommends against partnerships because of this lack of liability protection.

* Partner X is financially and legally responsible for the actions of Partner Y and vice-versa.

* Disputes and lawsuits are more common in partnerships than any other business, the Entrepreneur article reports.

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Pros of A Home-Based Business:

* You can work at non-work hours — if you want to. Some people are productive from 9 a.m. to 5 p.m. Others are productive at unusual hours. You can also invite prospective customers to your home at non-work hours — when they’re not at their employer’s office or store.

* It’s inexpensive. The Forbes magazine article “The Pros And Cons Of Working At Home” points out that you can invest the money you save on rent in other aspects of your business. The lower expense can also increase profits. Most home-based entrepreneurs have less than $5,000, reports the Inc. magazine article “Home-Based Business: Is it for You?”

* You can deduct a part of your rent or mortgage from your taxable income as a business expense. If your office is 25 percent of your home, you can deduct 25 percent of your rent, mortgage, utility expenses, home-insurance, and real estate taxes via Form 8829. This IRS document provides more information.

Cons Of A Home-Based Business:

* You have to be more motivated to work at home than in a setting where everyone is working. It’s crucial that your family understands that your home office IS your office and the rules for interrupting you during your work hours are no different than when you worked at a business office.

* You might lose customers who will feel that your business is not a real business when they learn it is in your home. You can minimize this disadvantage by asking clients to meet you at hotels, convention centers, and other facilities that cater to entrepreneurs and business executives who are looking for a conducive place to conduct business.Here is an example of a company that caters to entrepreneurs who need meeting space.

* You might have a hassle with the municipality where you live. Checking on whether a business in your industry is permitted is mandatory.

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Pros Of An Online Business:

* Getting web traffic is easier than foot traffic, says “Essentials,” a report by Dun & Bradstreet’s Small Business website. “Unlike a physical store, you don’t have to wait for customers to fall into your lap – you can proactively go out there and get them,” the report says.

* Customers can buy your product and service 24 hours a day and prospective customers can shop at your website 24 hours a day.

* Online businesses in this day and age can save a lot of money by having virtual offices instead of physical offices. Virtual offices give entrepreneurs access to physical offices when they need them for conferences and face-to-face meetings and also provide business addresses and phone services to entrepreneurs. Here is an example of a company that provides virtual offices, Servcorp.

Cons of An Online Business:

* Many prospective customers want the personal touch. They would rather have a conversation with a salesperson about the products and services they’re interested in buying than an e-mail exchange about what they’re interested in.

* You could be at a severe competitive disadvantage if you’re in an industry that consists of several high-quality businesses that have offline and online operations.

Prospective entrepreneurs who are interested in launching their own business have several alternatives. They can also buy a franchise. Here are the pros and cons of that.

Always remember that being an entrepreneur takes a lot of work. Good luck.

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