2.3 What kind of legal structure should you choose?

There are three main legal structures to choose from: sole proprietorship, partnership, and corporation.
A sole proprietorship is the easiest legal structure to start since there are relatively fewer formalities and
legal restrictions. It allows complete control over the business and profits, but the owner is fully liable for
all debts. If the business fails to meet its obligations, creditors can take possession of personal assets.
Another challenge is raising capital, as banks typically require collateral and periodic loan payments,
regardless of the business's earnings. Therefore, the risk of personal assets, including family assets, is a
significant consideration when choosing a legal structure.

A partnership is a potential solution for businesses seeking financial support and management.
However, finding a partner with similar goals, expertise, and a suitable work style can be challenging. It's
like finding a spouse and choosing wisely is quite difficult. Many partnerships end up in disaster under
crisis, as entrepreneurial ventures often face chaos and conflicts. Therefore, it's essential to choose
wisely and bear the consequences.

Partnering with entrepreneurs offers companionship, increased funding, and the ability to recruit and
motivate key individuals. However, it can also lead to losing control, wealth, and accountability. Typically,
entrepreneurs seek partners to raise money, with expertise often being secondary. Key considerations in
a partnership include determining who will contribute the most money, sacrificing equity for additional
investment, determining exit options, making spending decisions, signing checks, and managing staff. It
is crucial to balance these factors to ensure a successful partnership.

To avoid disadvantages, find a partner who complements your strengths and weaknesses rather than
one who has a similar background to yours. Look for someone who specializes in your weakest area.
Ensure they are trustworthy, compatible, and can communicate with easily. Evaluate their ability to
compromise and as much as possible, be wary of partnering with family and friends. Most often you will
end up gaining a partner but losing a friend. Consider a trial period before settling on a partner and
sharing ownership of your business venture.

Entrepreneurs incorporate their ventures as a corporation exists separate from its founders, owned by
shareholders, and run by a board of directors elected by shareholders. Corporations have three main
characteristics: First, they limit stockholder liability to their investment in the business. Second, if
shareholders are active in operating the business, they are considered employees and must be paid a
reasonable wage subject to the provisions of the Labor Code. Lastly a corporation must pay tax on
income as a separate legal entity. In addition, corporations shield shareholders from the claims of
creditors and contractual relationships, unless the shareholders sign personally instead of as officers of
the corporation.
Quiz questions.

1. Give the Three major types of legal structure

Ans: sole proprietorship, partnership, and corporation.

2. Corporation have __ main characteristics

Choices:

 Two main characteristics.

 Three main characteristics
 Four main characteristics.

Ans: Three main characteristics

3. What is one important factor to consider when choosing a business partner?

Choices:

 Their favorite color

 Their ability to juggle.
 Their Trustworthiness, Compatibility, and effective communication.

Ans: Trustworthiness, Compatibility, and effective communication.

4. is the easiest legal structure to start since there are relatively fewer formalities and legal restrictions.

Choices:

 Sole Proprietorship
 Partnership
 Corporation

Ans: Sole Proprietorship

III. APPENDIX

A. What is CSR?

Corporate Social Responsibility (CSR) talks about your business’ responsibilities to the society where it is
located or where it is located or where it operates. CSR is also referred to as:

 Corporate or business responsibility

 Corporate or business citizenship
 Community relations
 Social responsibility

Why is CSR Important?

“CSR is an important business strategy because, wherever possible, consumers want to buy products
from companies they trust; suppliers want to form business partnerships with companies they can rely
on; employees want to work for companies they respect; and NGOs, increasingly, want to work together
with companies seeking feasible solutions and innovations in areas of common concern. Satisfying each
of these stakeholders groups allows companies to maximize their commitment to another important
stakeholder group- their investors, who benefit most when the needs of these other stakeholders groups
are being met. I honestly believe that the winning companies of this century will be those who prove
with their actions that they can be profitable and increase social value- companies that both do well and
do good. Increasingly, shareowners, customers, partners, and employees are going to vote with their feet
—rewarding those companies that fuel social change through business. This is simply the new reality of
business—one that we should and must embrace.”

Carly Fiorina
Chairman and Chief Executive Officer
Hewlett Packard Company