Today, more than a few business owners conduct transactions with no problems even though their business has never been incorporated. On the other hand, sole proprietorships and partnerships can limit a number of expansion options that are open only to corporations. Before you make a decision on which business to declare, you may want to revisit the advantages and disadvantages of owning a corporation.
Perhaps when it comes to branding, it can be said that impressions are everything. When people see a product or hear about a service, there is a natural instinct to want to know who is behind it. In the case of a company, there are many cases where people have more faith in buying from a corporation than they would a partnership or a sole owner type of business. Among other things, there is the perception that a corporation has the greatest degree of permanence, which makes clients feel more confident about any after purchase matters that need to be taken care of.
Even though your potential customers may still buy from partnerships and sole owners for mowing their lawns or other important purchases, they will still expect to see a corporate business structure behind most other items. Consider the difference between buying a paper clip from XYZ Corporation and the XYZ Partnership. Do you see the difference? The first name makes you believe the seller has the factory and materials available to produce paper clips. The second name, on the other hand, might make you think of charity offerings, or something less professional. Even if the product is stellar, and exactly what the client is looking for, the business type still has a subtle, but tangible effect on the branding.
When it comes to branding, it is very important to realize that consumers evaluate your products and services in a matter of seconds based on first impressions that can cover hundreds of tacit factors. In this case, when they see “corporation” included in the manufacturer or producer’s name, there is an implied degree of reliability built into the branding. Remember, branding is also about tapping into cultural values that aren’t always talked about let alone admitted to. In this case, the view of corporations vs other business structures may be something that you have to tap into in order to give your products even the most basic chance of competing in a crowded market.
Best Level of Asset Protection
The moment you offer goods or services to others, there is a chance that you may get sued or wind up with more bills than you can afford to pay. While sole ownership and partnerships will give you a chance to have a separate business name, they will not shield your personal assets from seizure if the business gets into some kind of problem. No matter whether you have a house, a new car, money in the bank, or even a robust stock portfolio, it can all be taken from you unless your business is declared as a special legal entity that is entirely separate from your personal assets.
Consider a situation where you are selling used cars. Now let’s say that someone buys a certified safe vehicle from you, and promptly winds up in a very bad accident. Even though you may feel that you did everything possible to ensure the vehicle was safe to drive in accordance with Australian safety guidelines, that doesn’t mean the buyer of the vehicle won’t try to sue you. Let’s expand on this situation and say that the accident was caused by brake failure, and an investigation revealed that the brake fluid reservoir had been empty or not full enough. Depending on the timing of the accident, they may also conclude that your business was careless, or neglected to take proper precaution before releasing the vehicle to the client.
If you have a corporation, but no business operating insurance, the only assets that can be assigned to your customer are those declared as owned by your business. For example, if you own property for the dealership and property for your home site, they can only attach to the dealership property and not your home site. Sadly, if you have a sole ownership or a partnership in the same situation, the courts can attach a judgment to your home site and everything else of value that you own.
Professional Status that Makes it Easier to Negotiate Contracts
Regardless of your product or service type, you will wind up doing business with other businesses. This includes buying from other businesses during the process of manufacturing your own product or reselling a service from another company. You may also be in a niche where other businesses will want to buy from you for much the same reasons.
When it comes to business to business transactions, you will find that contracts are a necessary tool for ensuring that projected plans and commitments are defined and followed through on. No matter whether the contact is verbal and sealed with a handshake, or based on complex forms drawn up by a lawyer, the ability to negotiate decent terms is as much based on power and perception as branding. In this case, saying that you represent a corporation conveys much more power than saying you represent a sole ownership or partnership.
During the process of negotiating a contract, it is important to realize that the person negotiating with you is always going to look for a way to bargain better terms for themselves or the people they represent. When you represent a corporation, the other person may or may not have the confidence to ask about talking to someone else. On the other hand, if you reveal that you are working for a partnership, they will immediately think the bonds between you and your partners may not be very strong. This, in turn, may cause them to think they can talk to your partners and get a better deal from them. Finally, when it comes to negotiating on behalf of a sole ownership, the other person will automatically assume you have the weaker stand to negotiate from. Impressions alone will not always win the bartering and negotiation game, however even a slight advantage can make a bigger difference than expected.
Increased Compliance and Related Paperwork
As useful as corporations may be when it comes to making a good impression on clients and business associates, they do require a lot more paperwork. Among other things, you will need to file many more tax forms with the government, and will have to keep your books in a specific way. Because corporations can sell stocks based on their ability to make a profit, you may find that this business type is audited more often, especially if a lot of money is flowing through the business.
Ability to Have Stock Options Can be Good or Bad
There is no question that taking out loans is the worst way to raise money for your business. Aside from the fact that you have a debt and interest to pay off over long periods of time, there is always the concern that loss of revenue combined with excessive debt is a recipe for forcing a business to be wound down. On the other hand, when someone invests money in your business, there is no guarantee that it has to be repaid. In most cases, all you have to do is declare your profits and share the agreed upon dividends with each investor. This structure makes it much easier to peg payment to investors to your bottom line without cutting into money that you need to cover basic operations.
Even though stock and bond offerings are a viable and vital way to raise money for business start up and expansion, people do not buy these instruments without expecting to get something of value for their investment. For example, if someone buys stock and invests $10.00 a month in your business, they may want to see at least that amount coming back to them. If the buyer of the stock or bond doesn’t get the expected dividend, they may sell the stock to someone else at a lower than desired value. This, in turn, can create a downward spiral in your company’s ability to raise money through selling off stock shares. Remember, if you can buy a paper clip from the source company for 1.00; but someone else is offering the exact same brand and model paper clip for .50 cents, you will more than likely go with the cheaper option. From that perspective, stock investor volatility can easily put a stranglehold on your business or drive it under if you can’t get a loan to cover any expansions you had been planning on.
Making the decision to start a corporation should not be taken lightly. While there are certain advantages in terms of perception of power, and legal standing in asset related matters, there are also some drawbacks. Regardless of the business type that you choose, or the questions that you have about business formation, do not hesitate to contact and ask us to take care of business registration on your behalf. Here at (name), we are more than happy to make sure you understand all the pros and cons of each business type, plus help you assess which one will be best for you at this time.