Entity Selection Exercise – Elements of Business Formation
Five friends are planning to form a commercial construction business, but with the combined savings they do not have enough assets to start their business. The group came up with a plan of either to obtain bank financing which require them to put collateral; or outside investors who will demand control with no personal collateral. Idea and Vision for the Business
It is apparent that if they start up their commercial construction business, they would definitely succeed since majority from those five friends had worked closely with successful homebuilders while one headed the local division of national construction with two years of experience. Although only two of them have experience in running companies and have sizable assets, there is always an alternative to gain their source of capital. However, before they think of financing they should begin writing a business plan, which is a good idea for lenders to oversee how your investment will do in the market. This would determine its acceptability for private equity investors. The step for business plan is for them to think that the main idea of the business is to create a profitable commercial construction company and make it very successful against competitors in market.
This plan will lead them to know who will control the business, who will own the business, how are they going to come up with good decisions and know how much the start-up cost to finance. Every business is different, and has its own specific needs at different stages of development, so there is no universal method for estimating your startup costs. But then in applying the situation of this group, who believed that their company will boost but reluctant to engaged in finance is somehow misconstrued with their decision. In order to determine how much money you will need, you must calculate approximately the costs of your business for at least the first several months. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know that you will have enough money to launch your business venture.
However, business owners should take in consideration on how to choose the right type of business venture. Business entity depends on many factors, in whichever form of business is chosen may have a great impact on the success of the business. It will have an effect on how it is to obtain financing, how taxes are supposed to be paid and the amount of control the owner has over business.
Legal and Regulatory Issues In order to start a business, there are so many ways to consider, one of which is if they are following legal and regulatory issues. This should be carefully reviewed before they make decisions on what legal entity would suit the most. These are the following:
1. Difficulty and cost associated for business creation. As we all know, it is very crucial and it takes a lot of time to complete creation of a particular organization. For that reason, it is essential to review all legal entities and the cost associated in order to make decision that would suit the most for commercial construction business. 2. Transfer of ownership. This is another factor to consider when selecting organizational form for a business. They need to evaluate what obligations owners might have after business dissolution. 3. How to Control decision making in business. Since five friends are going to start the construction business, it would be very hard to make collective decision because of their different points of views. This is the reason why control of making decision is important; to correct approaches in resolving conflict situations in identifying prior opening of a new business. .
4. Personal liability should be chosen for commercial construction. With the group situation, there are two alternatives available: the bank financing and Outside Investment. We all know that business involves money as the major requirement to start a business. Well as, either they do business with bank or outside investors; they both would tend to involve capital. Since both firms need to know if you are willing to take a significant financial risk in the business or if you are responsible and can manage this business. The only difference from these two firms is that banks are more conservative with their investment dollars. Unlike many outside investors, they are far more likely to approve a loan for an established business over a start-up or emerging company. 5. Profit distribution and earning’s taxation. Since there are five friends with different initial investment involved, profit distribution factor should require careful analysis in order to come up with the right decision.
Selecting Professionals for Business Advices
To start a business, choosing the right professional is an important step to achieve something. First rule, choose people whom you have trust and have built self-reliance with. These are people whom you worked for many years and relatives you can trust as well. Second rule I consider, is selecting the right professionals who understand business concepts and have experience of running business in which you are trying to open or manage.
With the five friends’ situation, you can see there is a mixture of both elements; these are professional construction, managerial experience and sizeable assets. I consider this situation as a big plus to succeed in commercial construction and achieve their goals as long as they all contribute or share their expertise in any way.
Choosing Appropriate Legal Entity
After careful analysis, evaluation and after comparing their advantages and disadvantages, choosing the right legal entity for commercial construction business would be the final step in our decision making. In this case, Limited Partnership would not be the best choice for construction business formation since there are only two friends who have sizeable assets and have little construction business experience but running companies in the past may be considered as General Partner since they have bigger financial interest in the company. These would allow all partners to share control and participate equally in management. Profits and losses are divided among partners in any manner they choose. General Partnership is the best choice since they have management control, and with careful analysis it is obvious that they can also have big financial interest in the company.
I therefore recommend, S Corporation as the best choice in starting business construction. This is because five friends have different amount of money to invest that would have the flexibility to divide ownership into multiple unequal shares. It would also allow investors together and obtain needed capital for investment, which will reduce bank financing of construction business. I can also say that, three of these friends who worked with successful homebuilders, wherein one of them headed the local division of national construction with two years experience will be able to control managerial decision-making process: shareholders, directors, officers. These three people cannot be held responsible for the debts and obligation of the corporation but only to the amount of their investments. Another key factor is the transfer of ownership, which is easily done by the sale of stock in S Corporation.
(2002). Start-Up Financing. Money and Finance; Retrieved. July 13,2005 from the World Wide Web https://www.entrepreneur.com/