Choosing the Form of Business Organization

Basic Business Cents

One of the first questions facing an entrepreneur is what type of organizational structure is best for the start-up company. This is a key decision that could have serious consequences later; one that many entrepreneurs are ill equipped to make. A free publication by the Small Business Assistance Office of the Minnesota Department of Employment and Economic Development (DEED), titled A Guide to Starting a Business in Minnesota, devotes 60 pages to this subject. This 357-page book covering a variety of start-up considerations can be obtained without charge by contacting:

Telephone: (800) 310-8323,

Fax: (651) 296-5287, or

Email: deed.mnsbao@state.mn.us

A simple comparison of the four basic business structures can be viewed by comparing pros and cons of each. Note, this is the author’s opinion drawn from research and experience and does not constitute a legal position. Legal advice must come from an attorney admitted to the bar in Minnesota and is a necessity for anyone considering starting a new business.

	PROS	CONS
Sole Proprietorship	Simple Owned and controlled by one individual Profits are taxed at the individual’s rate	Individual is responsible for all debts and obligations of the business Individual bears the legal responsibility for the business
Partnership    General Partnership      Limited Partnership	All partners share equally in the right, and responsibility, to manage the business Partners are taxed on their respective share of the profits at the individual’s rate. The limited partnership must have one General Partner and at least one Limited Partner. The limited partners share in the liability only up to the amount of their investment in the business.	Each partner is responsible for all the debts and obligations of the business Partnerships lead to disagreements causing serious disruptions to the business The General Partner has the right and responsibility to control the partnership but is responsible for the debts and obligations of the business. Limited partners do not have the power to act or bind the business.
Limited Liability Partnership (LLP)	The personal assets of the partners are shielded against liabilities incurred by business in tort and contract situations. Profits are taxed on the individual’s respective share of the business at the individual’s rate.	Care should be taken that the correct initials must be displayed as a part of the name of the organization. An LLP is a fairly new form of entity and not well understood by everyone.
Limited Liability Company	Liability for business debts and obligations generally rests with the entity rather than with individual owners. It is not subject to many of the restrictions that apply to an S Corp.	Must obtain both Federal and State Tax ID numbers.
Corporation       S Corp      C Corp	A corporation is a separate legal entity, which in most cases shields insulates shareholders from claims against the corporation. An S Corp is taxed much as the same way as a partnership. Profits/losses flow through to the shareholders in proportion to their holdings. Best liability protection for the shareholders.	The S Corp must meet the statutory requirements like no more than 100 shareholders, no alien shareholders, only one class of stock. Dividends and salaries are taxed at the individual’s rates plus the entity has already been taxed at the corporate rate.

An individual or partnership that conducts business in Minnesota under a name that is different from the full, true name of each business owner must register the name of the business with the Secretary of State.  An assumed name will not be accepted if it is the same as the name as another entity on file. Business owners may call the information line of the Secretary of State (651) 296-2803 go to the web site at www.sos.state.mn.us to determine if the name is available.

All businesses will encounter certain organizational costs. Both legal and accounting professional help is strongly advised.

Source: A Guide to Starting a Business in Minnesota

Thirty-Second Edition, January 2014

Minnesota Department of Employment and Economic Development

Closing the Gap in Your Management System

Basic Business Cents

Our last column presented an overview of a management system for performance improvement to close the gap from where you are today to where you want to be, or need to be. This system ,called ADAMS, is an acronym for Assess, Discover, Act, Manage, and Sustain.

Phase 1. Assess

·      Complete an assessment of performance and perceptions. A complete disciplined determination of your organization’s performance is important to document your starting point; and since perception is reality, check on how you are viewed by customers and by the marketplace. The MN State Quality Award or the Malcolm Baldrige Award criteria have excellent ways to assess any organization.

·      Verify strategic alignment. Determine if your current position and where you desire to go are properly aligned with your strategy. Misalignment is often a major cause of problems.

The output of this phase is a clear and well-documented picture of your organization’s current performance, where it needs to be, confirmation of alignment between strategy and current direction, and a baseline for measuring future progress.

Phase 2. Discover

·      Establish Discovery Teams. Establish individuals or teams to investigate barriers preventing the organization from achieving breakthrough results.

·      Select Projects and Formalize Portfolios. Define the most prominent problems and issues and establish projects to address.

·      Determine Appropriate Initiatives. Determine the approach, tools, and methods to improve the processes or systems of complex problems.

Based on a disciplined review of the underlying problems facing your organization, define and prioritize specific projects to be completed and establish broad portfolios to manage.

Phase 3. Act

·      Do it! Establish a culture and approach where obvious problems are solved without undo management review and analysis.

·      Deploy Initiatives of Complex Problems. Select teams to address major problems, provide them with tools, authority to make process change, and manage progress.

Because of a focus on quick-hits and deployment of long-term initiatives, you are able to see immediate results and the efficient use of everyone; everyone gets involved and committed.

Phase 4. Manage. Once the assessment has been completed, the direction and action determined, and initiatives deployed, the most important function is to successful manage all of these activities. This is an iterative process where you will need to often return to review your assessment and verify your results. The deep involvement of senior management and the constant commitment of employees at all levels is required to continue to drive positive results.

This phase ensures an effective coordination of short-term projects with long-term initiatives. Best practices must be shared and driven across all functional elements.

Phase 5. Sustain. Success in assessment, discovery, action, and management can still run the risk of seeing initial success deteriorate into long-term failure. If you want long-term success, you must master the last phase-Sustain.

·      Institutionalize. Move beyond changing behavior to changing culture. This is a difficult task, yet it has the greatest benefit. If you focus only on the improvement techniques and not address the culture of how you work, manage, and treat others, then the lasting effect desired will be eluded. An atmosphere of mutual trust and respect must become pervasive throughout the organization.

ADAMS is an iterative system where you will need to constantly work through all of the phases enabling you to drive to higher levels of performance. If you don’t, your competitors surely will.