So how does an owner begin to digest and pick between all the choices (function, product, process, project or matrix structure, flat versus tall, centralized versus decentralized) available when it comes to organizing a business?
To design a better business, owners should take these steps:
- Schedule time to work on the business. This applies to start-ups and established businesses. There is an old saying, “If you are chopping wood, you need to take some time to sharpen the axe”.
- Write everything down. Document all job descriptions, processes, and procedures, and then refine the processes so the result is reliable and high quality output. In his book The E-Myth, Michael Gerber makes the case that entrepreneurs should build and document their business as if it were the first of 5,000 locations, even if they never plan to expand.
- Try to become unimportant to the day-to-day operations. A business that would cease if something happened to the owner has very little value to a potential buyer. If the business is a turn-key operation with documented and reliable processes, it has much greater value to the current owner and future buyers.
- Be prepared to change roles as the business grows. As time goes on, the amount of time an owner spends working in the business should decrease. He or she should embrace the role of a CEO who is working on the business.
In the introduction of this chapter we likened the business owners’ role to a musician. In the early stages of the business, the owner had to play every instrument. But if the business is to grow and prosper, the owner must become the conductor of an evolving orchestra. If an orchestra has good musicians, excellent sheet music, and a talented conductor, the result is beautiful music.
Us legal issues
Because laws regulating business vary greatly by country and locale, entrepreneurs should pick a legal entity for their business in consultation with a local attorney that specializes in business law. The legal issues discussed below reflect general practices in the United States where laws governing business vary not only by state, but by local jurisdictions within states.
Businesses activities are organized either by individuals, couples or groups of people.
Businesses with one owner (the most common and referred to as sole proprietorships in the United States) can be launched without any legal assistance, and depending on the location, with or without certain permits.
Businesses with multiple owners typically write out explicit guidelines regarding investment and management issues using one of several types of legal agreements designed specifically for business organizations. Thus, one of the first decisions facing new business owners is deciding what legal entity to use for their business. That decision-making process typically weighs the following issues:
- how much time or involvement in the business is required
- what skills are required
- degree of risk associated with the business
- amount of capital needed
- tax regulations on labor and income earned by the business
In the United States, there are four basic types of business operations:
1. Sole proprietorships
A sole proprietorship is an individual owner of a business (with or without employees). This type of operation is the simplest to form, and the single owner, or sole proprietor, may work as much or as little time as desired. The sole proprietor is generally held accountable for all products and/or services produced by the business, as well as debts and liabilities of the business. Since the owner’s personal liability extends well beyond amounts invested in the business or even beyond assets purchased by the business, this type of operation is considered high risk.
The amount of capital required to start a sole proprietorship is generally minimal.
In addition to sole ownership of all assets and liabilities, the proprietor benefits by receiving all profits, which in the United States are taxed as part of the owner’s total personal income. The sole proprietor may employ workers or engage independent contractors to increase skills available, but the business ceases to exist upon the owner’s death.
A sole proprietor business can be organized at any time into a different legal entity. The owner often decides to reorganize when profits substantially increase the individual's tax liability.
When two or more family members or people join together in a business operation, they may choose to establish a partnership which can take the form of a general or limited liability partnership. General partnerships are similar to the combination of a group of sole proprietorships in that the partners share workloads, profits, and liabilities. Limited Liability Partnerships, however, usually include one or more partners who manage daily operations and are generally liable for the debts of the business while other limited partners risk their investment in anticipation of profits.
Initial agreement is essential concerning how the partnership will operate, who will manage daily operations, how profits will be disbursed, and who assumes liabilities and debts. Such an agreement is normally formalized in writing and is known as a “Partnership Agreement”.
Partnerships, like sole proprietorships, are generally dissolved upon the death of a partner. Profits are shared in accordance with terms of the Partnership Agreement and reported to taxing authorities on personal tax returns of the partners.
In the United States, corporations are considered separate legal entities that are chartered and regulated by an authority in each state, such as the Secretary of State. Additionally, a separate agent who acts on behalf of the corporate entity is identified in the initial application process to receive legal notifications. Corporations must also submit identification and governing documents such as Articles of Incorporation and By-Laws. Corporate entities are generally required to be kept in active status through annual updates to a regulatory authority. As a result, this type of entity is deemed slightly more complex to form and manage.
Corporations require investment by one of more owners who are known as “shareholders” or “stockholders”, and the amount of investment varies depending on the needs of the business. Since this form of entity provides protection (widely known as the “corporate veil”) for the personal assets of owners against certain types of claims, it is generally of lower risk. Corporate entities may
vary in numbers of owners from a single shareholder to an unlimited number. States and federal agencies regulate financial activities and reporting requirements that are categorized by the number of shareholders and whether their shares are available to purchase and sell on public stock exchanges. For example, US corporations with publicly traded shares are regulated by the US Securities and Exchange Commission.
The corporation may employ workers and engage independent contractors as needed to increase skills available. Corporations are required, however, to acknowledge formally (in a written document) the individuals who are approved to engage in financial transactions on behalf of the entity.
In the United States, the Internal Revenue Service regulates federal tax codes. There are two taxing options for earnings of corporations: a progressive structure on profits for the traditional corporation and another that allows owners to “flow-through” profits to their personal tax returns.
4. The Limited Liability Company (LLC)
In the United States, the Limited Liability Company (LLC) is the entity of choice for the owner or owners who prefer the limited liability afforded by a corporation and a tax treatment that allows profits to flow from the business to the owner or owners. The LLC must also be registered with a State authority, but requires less documented structure. Ownership is acknowledged by percentage as opposed to number of shares and protection for the owners is similar to that of a corporation.