Business entity matrix: sole proprietorship versus partnership
| Management Control | Financial Liability | Tax | Risks | |
| Using Own Inheritance (Sole Proprietorship) | The owner controls all operations and policies of the business | The owner is solely responsible for all debts and obligations of the business | The owner is responsible for paying taxes on his/her personal income as stated on the tax return | The owner bears all the risks associated with business. |
| Partnership with Friends | Control will be shared between partners, and most important decisions have to be made in conjunction with others | The responsibility is shared by partners.
There is a possibility to start a limited liability company (discussed below) |
As with sole proprietorship, but tax is considered separately on individual tax returns | The financial risk is spread more evenly among partners.
The risk of fraud. |
The above matrix demonstrates the benefits and drawbacks of each business type. The individual deliberating over the sense of entering into a partnership as opposed to forming an individual venture has in the first place to think about the chances of success and the threat of bankruptcy.
A partnership is more advantageous because it allows a person to share financial burden with others. Even more importantly, the company can then be registered as a limited liability company which will make the business responsible only in the amount of money brought in by the partners.
However, there is a trade-off between lower risk and degree of financial and managerial control. Situations when partners try to cheat each other out of money are unfortunately frequent and have to be considered. Situations when partners squabble for control are even more frequent, and thus a sole owner will have more unified control and possibly strategy. With all this said, I would most probably still bring friends into the business. Being a risk-averse individual, I would want to share the risks and spread liability more evenly. Besides, the possibility to form a limited liability company is very attractive as it would lower the threat to lose all money to lawsuits.
Matrix: hiring employees versus using independent contractors
| Compensation | Benefits | Control | Motivation | |
| Hiring Employees | Basic compensation will be higher since employees live only on income from one company | Employees have to be provided with benefits such as health insurance, pension plans etc to comply with legislation and remain a competitive employer | Hired employees will be easier to control since they will have first-hand access to company policy-making | Hired employees may be more motivated to work for company where they can rise through the ranks to top managerial positions |
| Using Independent Contractors | A lower compensation due to spreading earnings across several product lines sold by one subcontractor | Independent contractors settle benefit issues on their own | Control can be difficult due to the presence of many links between actual salespeople and the company | Less motivation |
The main advantage of subcontractors is that they can lower the costs by selling products of different companies. Apart from issues mentioned in the table, hiring independent contractors to sell products has other advantages. These contractors, sometimes called manufacturers’ agent “provide relocating or start-up firms with immediate front-line information on marketplace trends and demographics” (“Manufacturers’ Agents”, n.d.). Concentrating on the market, they have immediate access to what the customer thinks and feel and can provide feedback.
However, the company loses control over its sales force that can choose to behave in ways it thinks fit and, for instance, adopt the ‘pushy’ sales style undesirable to manufacturers. Besides, working for several companies at a time, contractors lower costs, but are not always able to devote the necessary time to all product lines. If they feel that my business does not bring them as much profit as they want, they can start to overlook my products and devote more effort to others. For these reasons, I would prefer to bear the expense of hired salesforce.
References
- “Manufacturers’ Agents”. (n.d.). Retrieved March 1, 2006, from http://www.referenceforbusiness.com/small/Mail-Op/Manufacturers-Agents.html
- Venexus. (2005). Business Entity Matrix. Retrieved March 1, 2006, from
- http://www.venexus.com/Services/BusinessCreationSystem/Incorporation/BusinessEntityMatrix/tabid/129/Default.aspx
