Saturday, May 2, 2009
How to make the “right” legal decisions for your new business
A decision must be made about the legal structure of the business. That is, will it be a sole proprietorship, a partnership, or a corporation?
On this page we have just given you the basic gist of each type of legal structure. To understand each type of legal structure in much more detail, you could go though “How to incorporate?” It is complete guide on the different types of legal structures and the legal procedure of starting up your company.
Sole Proprietorship: (business owned by one person)
Advantages:
Ease of formation
Sole ownership of profits
Control and decision making vested in the hands of the owner
Flexibility
Freedom from government control and taxation.
Disadvantages:
Unlimited liability
Unstable business life if the owner should die
Less available capital in other types of business structures
Relative difficulty in obtaining long-term financing
Relatively limited viewpoint and experience of proprietor
Partnerships: (business owned by two or more persons)
Advantages:
Ease of formation
Direct rewards
Growth and performance facilitated
Flexibility
Relative freedom from government control and special taxation
Disadvantages:
Unlimited liability of at least one partner
Unstable life of business (e.g. if one owner should die)
Difficulty in obtaining large sums of capital
Firm bound by the acts of one partner as agent
Difficulty in disposing of partnership interest (e.g. if one partner wanted to buy out the other partner)
Corporations: (a legal entity distinct from those parties or individuals that own it)
Advantages:
A shareholder or partner’s liability is limited to a fixed investment amount
Ownership is readily transferable
Separate legal existence
Ease in securing capital from many investors
Ability of the corporation to draw on experience and skills of more than one individual
Disadvantages:
Activities are limited by the charter and various laws
Extensive government regulations are required
Less incentive for manager if he does not share profits
Expense of forming a corporation is high
Considering the different advantages and disadvantages of the various structures, you could choose a legal structure you would like to go for.
How to make the “right” business decisions
Once you have decided what your business objectives are, the next step would be to take appropriate steps to achieve your business objectives. These steps are your business decisions.
If you have a running company, then these business decisions are your strategies. Making the right strategies will help you reach your business objectives. However, since you are an entrepreneur, your biggest concern is “starting up” your company. You do not really have to make business strategies. You just have to start up your company.
To start up your industry, you will have to make the following decisions:
- Legal decisions
- Personnel decisions
- Production decisions
- Purchasing and inventory decisions
- Marketing decisions
In this guide we have just given you the introduction to the various decisions involved. Each of these decisions is actually very deep. There are whole books written on marketing, inventory control, production practices etc. Here we just provide you an introduction to give you an idea about what is involved.
Why are business objectives needed
Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful.
When setting business objectives, one must make sure that they are:
Quantitative: The business objectives should be expressed in terms of numbers. It should not be expressed vaguely like, “Our sales should go up!”
Time-frame specific: Time frames should be specified in the business objectives. This helps you to understand where you stand with respect to the completion of the current objective.
Flexible: It is very important that your business objectives are adaptable to change. If the situation in which the business is working changes, the business objectives should change to reflect these changes.
Understandable: The business objectives should be made in an understandable way. This helps in communicating your objectives to your investors, employees, partners etc. Without this communication of business objectives, it becomes very difficult to reach them.
Realistic: It is important that the business objectives are realistic, or you may end up disappointing your investors and your self.
Examples of business objectives:
“Sell 1000 units o product A and 500 of product B by December 31, 2007”
OR
“Maintain a minimum of 5% market share in the soft drinks segment in Pune City during the whole of 2006”
business objectives
Business objectives are specific statements that give projections about growth or development to companies. For example, a business objective could be, “We must triple the sales of our product by next year.”
Defining your business
A business definition basically tells you ‘what kind of business’ you are in. It is a one-line summarization of your entire business. It helps you clearly communicate what your business is about to others.
A business definition is generally based upon 3 points:
Who? : Who is your customer? To know this look at your customer description from “Understanding your business! (Situation Analysis)”
What? : What customer needs will be satisfied by your business. Remember needs are not only physical needs. There are also other needs like the need for achievement, need for status etc.
How? : What solution does your business offer to satisfy the needs of the customer.
For e.g. if it were a business making snacks the answers to the questions would be:
Who? People who want to “munch” something
What? Need to quickly quench their hunger in an enjoyable way.
How? By providing good tasting between meals food products.
A “sample business definition” using the answers to the above questions would be:
"We will manufacture good and tasty sweet snacks to enable individuals to quickly satisfy their hunger."
After you have your business definition ready, the next step is to formulate your business objectives.
Identifying personal objectives
This is the phase where you understand why you want to take up this new project of starting a company.
What is the purpose of this exercise?
Since YOU are starting a company, there must be some need that you would like to satisfy or some aim you would like to achieve though the company. We are not talking about business aims like “increasing market share” etc.
We are talking about personal needs and aims. Like the need for money, or the need for recognition and status in society etc. This exercise will help you understand and identify what personal needs you are trying to satisfy.
Having identified your personal needs, you have to see whether the company you are starting and the effort you take will be able to satisfy your personal needs. If the effort you put in setting up the company will not pay off and will not satisfy your personal needs then you rather not waste time, effort and money setting up the company.
Do this exercise so that you can set your personal goals and commit to yourself what you are planning to do. Besides, the most important reason to set personal objectives, is so that you have some basis to set your business objectives.
To understand your personal objectives, ask the following questions:
What is my motivation to start a business? Is it wealth, security, self-esteem or some thing else?
How much risk am I willing to take upon me?
How long and hard am I willing to work?
What is a reasonable timetable for my objectives?
When shall my personal objectives be reached?
Will I be able to “survive” if my objectives do not get fulfilled?
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