Exploring Business Ownership – Maybe You’re a High Rolling Entrepreneur – Part 6 of 7

We’re wrapping up a series on evaluating whether the concept of business ownership is right for you. Most recently we’ve discussed how to assess your risk tolerance by analyzing the way you think. We’ve covered the 3 main ways to earn income, outlined the risks associated with employment and franchise ownership, and how each personality type typically thinks. If you didn’t identify with either of those, then maybe you’re an entrepreneur at heart.

Entrepreneurial Business Ownership

Entrepreneur think is:

How can I meet the needs of my customers by profitably solving the problems they have?

If you want to chart your own course, solve all your own problems, be captain of your own ship, be totally responsible for whatever success or failure comes, and chafe at the thought of working for someone else in return for less risk, then you probably have the entrepreneurial bug.

Risk Assessment

Being an independent business owner is a high risk proposition with a high probability of first time failure.

Why high risk? Because you will most likely pledge every asset, such as home equity, savings, 401(k), etc., that you have to finance startup or purchase of the business. If your venture fails, you may very well lose everything you’ve spent or offered as collateral. (This is also true for franchise owners.)

Why a high probability for failure? Because first time entrepreneurs have such a clear vision of what they want to do and how to do it; they think they know everything! I have several colleagues who generally refuse to work with first time entrepreneurs because (in their words) “they think they know more than I do and helpful suggestions that I make are either ignored or become implementation battles.” Truer words were never spoken.

If your risk temperament is right in line with the type of person I’m describing and you want to go forward, then how can you improve your chances of success? Buck the trend by getting lots of experienced advice and counsel from those who have gone before! Be willing to listen to those who have graduated from the school of hard knocks and learn from their mistakes to avoid making them all again yourself, because you simply don’t have either the time or the money to survive the experience of learning it all firsthand.

We’ll wrap up this series in part 7 by outlining why businesses generally succeed or fail, and I’ll suggest some more reading resources and offer some advice on how to navigate a path to success.

Exploring Business Ownership – Franchises, a Controlled Way to Own a Business (Part 5 of 7)

In part 4 we began a discussion on how to assess your risk tolerance for business ownership by analyzing the way you think. I covered the 3 main ways to earn income, outlined the risks associated with employment, and how employees typically think. If you didn’t identify with “employee think” then maybe you’ll identify with franchise ownership.

Franchise Ownership

Franchise owner think is:

I can run the systems, methods, and procedures that are already defined and documented. If you’ll show me how, I can pull the right levers and push the right buttons to make the business work.

If you’ve had middle management experience or if you’re a “systems” kind of person, if you like a broader scope of responsibility while staying within certain rules, if you can solve big picture problems but enjoy support when you’re having a tough go of it, if you want more personal freedom than being trapped 9 to 5 in an office cube, and if you want to build equity in a business investment that you can eventually sell, then owning a franchised business model is worth looking into.

Most people think of restaurants when they think of the franchise industry. However, there are literally thousands of franchised business models available in the US in at least 50 different industries, although in my opinion probably only a few hundred are truly robust or mature enough to consider investing in.

When you buy into a franchised business model you license the right to operate a business, usually within a prescribed territory, using the franchise brand name and their products, services, and methods of operation. You basically operate a “clone” of what other franchisees are operating.

Presumably the products and services have been tested and perfected, target markets have already been defined, marketing campaigns have been developed, store designs have been created, and the necessary equipment has been specified. You essentially operate the business model in accordance with the methods and procedures prescribed by the franchisor. Some feel that it’s a controlled way of getting your feet wet in the business ownership world.

Risk Assessment

In my opinion investing in and operating a franchise is more risky than employment, but has less risk than an unsupported entrepreneur-owned business. The franchisor has a vested interest in helping you succeed in their business model because they get a royalty cut of your sales income stream.

However, it is certainly possible to fail in business owning a franchised business model. If you don’t follow their system, if you refuse to market your business, if their business model, product, or service simply doesn’t meet the needs of the market place, or for any of a number of other reasons, then you can loose your entire investment (just like entrepreneurial business ownership).

If your risk temperament seems to be right for the franchise area, then I highly recommend retaining an independent outside advisor to guide you through your initial investigation and evaluation of the thousands of concepts available. Like independent fee-for-service financial advisors, getting professional counsel to help you navigate through this area will be money well spent.

Did you identify with “franchise owner think?” If not, stay tuned. In part 6 we’ll explore how entrepreneurial business owners think.

Types of Business Ownership Structures

A business ownership should be structured according to the needs of the owners and potentially liability that the business could incur. The different types of business ownership are

Sole proprietorship

Partnership

Limited Liability Corporation

Corporation (for profit)

Nonprofit corporation

Limited Partnerships

This type of business organization is costly and complicated to prepare. It is not recommended for the average small business owner. Limited partnerships are usually created by one person or company who solicits investments from others. The people who invest are considered the limited partners. The general partner is in charge of the business’s everyday operations. They are personally liable for business dents. Limited partners have little control over daily business decisions or operations. Because of this they are not personally liable for business debts or claims.

A Corporation

The most significant benefit to forming a corporation is that it limits the owners’ personal liability for business dents and any court judgments against the business. A corporation is an independent legal and tax entity. This sets it apart from other types of businesses. The owners do not use their personal tax returns to pay tax on corporate profits because the corporation itself pays these taxes. Any money drawn from the corporation in the form of salaries, bonuses, etc is paid by the owners in their personal income tax returns.

Limited Liability Corporations

Limited Liability Corporations provide their owners just that, limited personal liability for business debts and claims. However, LLCs resemble partnerships when it comes to taxes. The owners of an LLC pay taxes on their shares of the business income on their personal tax returns. This type of organization is good for business owners who either

Could be sued by customers

Run the risk of piling up a lot of debt

Have substantial personal assets they want to protect

Sole Proprietorship and Partnership

A sole proprietorship, or partnership, is the ideal ownership structure for an up and coming business or the average small business. They do not have to be registered with the state and go into effect as soon as one person goes into business with themselves or two or more people go into business together. Any business income is reported on the owner’s personal income taxes. They are also personally liable for any business debts or court decisions against the business.

For more information on business ownership structures, visit www.businessdirectoryforyou.com