Synthesis
Now that you have come to the end of this module, you should understand that there is a range of possibilities for structuring, starting, and growing a business. Each choice has its advantages and disadvantages, and there is no single set of choices that will accommodate all businesses. Just knowing that there are choices to be made and a variety of possible paths is critical to the success of any business venture—large or small.
Summary
In this module you learned about the various legal forms for a business and the advantages and disadvantages of each. The following are key takeaways from this module:
Choosing an Organizational Type
Sole proprietorship, partnerships, corporations, and hybrids (LLC, LLP) are all possible options for the legal formation of a business. Each structure carries risks and rewards, costs and benefits. Which form of business ownership is best for an individual depends not only upon the nature of the business opportunity but also the level of personal exposure to risk the owner is willing to accept.
Sole Proprietorships
Sole proprietorships are the simplest and most common legal structure for a business. These businesses are owned and run by one person.
Partnerships
A partnership is a single business in which two or more people share ownership. There are two general types of partnership arrangements: general partnerships and limited partnerships.
Corporations
Although not the most common form of business ownership, corporations account for the majority of the revenue from business in the U.S. They are also the most complex type of organization to start and maintain. Types of corporations include C corporations, S corporations, and B corporations.
Hybrid Forms of Ownership
Fortunately there are options that enable the business owner to take advantage of limited personal liability and the benefits of partnership or corporate organization. These include the limited liability company (LLC) and limited liability partnership (LLP). Which type of ownership an owner selects will largely be determined by the size, objectives, and vision for the business.
Let’s take a look at how these different forms of ownership compare to one another.
| Characteristic | Sole Proprietorship | Partnership | LLC | LLP | Corporation | S Corporation |
|---|---|---|---|---|---|---|
| Owner(s) | 1 sole proprietor | 2 or more partners | 1 or more members | 2 or more partners | 1 or more shareholders | 1 or more shareholders |
| Sole authority for decisions | Yes | No | No[1] | No | No[2] | No[3] |
| Easy setup | Yes | Yes | Yes | Yes | No | No |
| Minimal regulations | Yes | Yes | Yes | Yes | No | No |
| Single taxation | Yes | Yes | Yes | Yes | No | Yes |
| Easy access to expertise | No | Somewhat | Somewhat | Somewhat | Yes | Yes |
| Easy access to capital | No | Somewhat | Somewhat | Somewhat | Yes | Yes |
| Limited legal liability | No | No | Yes | Yes | Yes | Yes |
| Unlimited life | No | No | Possible | Possible | Yes | Yes |
| Easy transfer of ownership | No | No | No | No | Yes | Yes |
Franchising
For aspiring business owners who do not have the time, vision, or resources to “start from scratch,” franchising is a viable alternative for business ownership. Everyone is familiar with franchises—many industries such as fast food are almost wholly comprised of franchises. As appealing as this may seem, there are still risks to franchising for both the franchisor and franchisee.
Mergers and Acquisitions
One of the quickest ways for a business to expand into other markets or product lines is either to merge or acquire/purchase another company. Although this is common in today’s business environment, there are still many complex factors to consider before deciding whether a merger or acquisition is the optimal solution.
Case Study: Native American Industrial Solutions (NAIS) and the sba 8a program
Among all of the possible ways to structure a business, i.e., sole proprietorship, partnership, corporation, LLC, etc., the Small Business Administration (SBA) has created a special program called “8(a)” designed to help firms owned and controlled by socially and economically disadvantaged individuals.
The 8(a) Program is an essential instrument for helping socially and economically disadvantaged entrepreneurs gain access to the economic mainstream of American society. The program helps thousands of aspiring entrepreneurs to gain a foothold in government contracting. Specifically, a SBA 8(a) company gets an edge in winning government contracts.
NAIS is an American-Indian owned 8(a) firm. They are an IT company specializing in IT Infrastructure, Software Development, Risk Management and Cybersecurity, and Artificial Intelligence and Machine Learning.
Since its establishment in 2013, NAIS has won government contracts to numerous government agencies, to include: Defense Intelligence Agency, Defense Health Agency, the U.S. Census Bureau, the Federal Aviation Administration, the Federal Highway Administration, the U.S. Army Cyber Center of Excellence, Washington Headquarters Services at the Pentagon, the United States Military Academy at West Point, and the Department of Homeland Security.
Although Cybersecurity and AI are hot business topics these days, NAIC benefited greatly from their 8(a) designation to gain technical and business expertise to capture contracts from these government agencies. For women and minority entrepreneurs, this program could help kickstart a very successful business.
About the 8(a) program:
To qualify for the 8(a) program, businesses must meet the following eligibility criteria:
- Be a small business
- Not have previously participated in the 8(a) program
- Be at least 51% owned and controlled by U.S. citizens who are socially and economically disadvantaged
- Have a personal net worth of $750 thousand or less, adjusted gross income of $350 thousand or less, and assets totaling $6 million or less
- Demonstrate good character
- Demonstrate the potential for success such as having been in business for two years
Businesses that participate in the program receive training and technical assistance designed to strengthen their ability to compete effectively in the American economy. Also eligible to participate in the 8(a) program are small businesses owned by Alaska Native corporations, Community Development Corporations, Indian tribes, and Native Hawaiian organizations. Small business development is accomplished by providing various forms of management, technical, financial, and procurement assistance.
There are several benefits to be gained from the program. Certified firms in the 8(a) program can:
- Efficiently compete and receive set-aside and sole-source contracts
- Receive one-on-one business development assistance for their nine-year term from dedicated Business Opportunity Specialists focused on helping firms grow and accomplish their business objectives
- Pursue opportunity for mentorship from experienced and technically capable firms through the SBA Mentor-Protégé program
- Connect with procurement and compliance experts who understand regulations in the context of business growth, finance, and government contracting
- Pursue joint ventures with established businesses to increase capacity
- Qualify to receive federal surplus property on a priority basis
- Receive free training from SBA’s 7(j) Management and Technical Assistance program
Watch this video to learn more about the benefits of the 8(a) program: Six (6) Benefits of the SBA 8a business development program – Eric Coffie.
Sources:
SBA 8(a) Business Development program. www.sba.gov/federal-contracting/contracting-assistance-programs/8a-business-development-program. Accessed May 6, 2022.
NAIS. www.nais-llc.com. Accessed May 6, 2022.
Additional Resources
U.S. Small Business Association (SBA) website
