Deciding on your company ownership (legal form)

Hi there!

Today I would like to discuss what you can expect by using our business plan software (Business Plan Pro) while writing the Company Ownership Section of your business plan. In my previous post I discussed the Company Summary of your business plan.

Of course, by the time that you discuss the ownership of your business in your business plan, you, most probably, have already decided what type of legal entity it should be. And as you know, this is an extremely important decision. My recommendation is that you spend some time on the subject of company ownership as this forms the basis of a sound business.

However, Business Plan Pro does recommend that if you start a new business, and don’t know what type of company to establish, you start off with a sole proprietorship until you have performed your research on the benefits of the different ownership options. It is also important not to be too penny-pinching when it comes to obtaining the assistance of lawyers and accountants to establish a legal entity. My advice is that you always obtain the assistance of these professionals to establish a new business.

Ipso facto, when talking about the company ownership of your business, we also refer to the form of entity (i.e. the legal status of your business). As said in my previous blog post, Business Plan Pro does provide access to a vast amount of information resources on the subject of company ownership and the legal form of your business.

In the Company Ownership Section of your business plan, you should describe the ownership and legal establishment of your company. Specify whether your company is a corporation, partnership, sole proprietorship, or a limited liability partnership. Who owns the business? This is the place in your business plan to discuss it. Provide also information on the proportion of ownership in this section. Finally, is it a private company or a public company?

A corporation is a legal entity and is protected by local and national legislation. As a legal entity it does have its own rights and obligations. A C Corporation is the more standard type of USA Corporation while the S Corporation is more suitable for family owned businesses with a few owners (profits and losses go to the owners and are not taxed separately first). A partnership is NOT a legal entity and is actually co-ownership by two or more owners (partners). The partners are responsible for the partnership’s activities, actions and debts in their personal capacity. The sole proprietorship is most probably the most risky type of business entity as the owner is responsible for all activities, actions and debts in his or her personal capacity. A limited liability partnership is a combination between a corporation and a partnership and the legal requirements of forming a limited liability partnership differ from local to local government.

Of course, you also get privately held businesses and public companies. Private companies are not listed on the stock market (i.e. do not obtain capital by selling shares to the public). Public companies, unlike private companies, do sell shares to members of the public – considered to be stakeholders in the company. In the recent past public companies have been under tremendous pressure from Government and public to be more transparent in their operations and especially in their financial reporting. This is due to several huge fraud cases in known and well established public companies.

Fraud ran rampant in known companies like Enron, WorldCom and Parmalat (and it is to be expected in many other companies as well, only, unfortunately for the investors, it has not been “discovered” yet).

As a result, governments reacted with very strict legislation in an attempt to prevent similar corporate scandals. For instance, in the USA the Sarbanes-Oxley Act places such a huge burden on board members to exercise due diligence in all types of corporate matters and decisions, that it is not hard to find consultants these days advertising their professional services to these companies in order to help them comply with the complex Sarbanes-Oxley regulations. Many of these consultants even use scary advertisements, picturing directors in jail because they haven’t complied with Sarbanes-Oxley!

The result is that many companies experience problems these days to obtain the services of experienced directors who are willing to sit on their boards; impeding on these companies’ capabilities to be dynamic organizations, ready to change and grow.

Normally, new businesses do not go directly to the market (public), via the stock market, to raise capital but start off as privately held businesses. To raise capital, they use their business plans to persuade investors (venture capitalists or even the Banks) to invest in their businesses. In my opinion, this is the way to go as the strict legislation on public companies leaves absolutely no room for common business sense at all.

If you have any questions, you are welcome to contact us at blog@business-around-the-globe.com

Warm regards

Michiel Jonker, CISA

Tags: Business Plan, Business Plan Software, Company Ownership, corporation, limited liability partnership, partnership, sole proprietorship