The COVID-19 pandemic has impacted our world in dramatic ways – from the workforce shifting to working from home to skyrocketing unemployment numbers. Many owners and C-Suite execs have had to make tough decisions about the future of their business, not to mention that a recession may also be on the horizon. But amidst all this turmoil, some businesses are flourishing: delivery services, grocery and liquor sales, and cleaning services to name a few. Might this actually be a good climate in which to start a business? Let’s take a look at the pros and cons.
Pros Of Starting A Business
- Time is on your side.
With many people working from home and social distancing rules in place, you may have more time to develop your business. Instead of spending a Saturday afternoon out at a brewery, your time can go into the behind the scenes work of forming your business. More hours can be spent drafting your business plan, doing competitive research, or creating your website.
- You can legally form your business at any time.
The legal formation, which includes filing documents with the Minnesota Secretary of State, can happen at any time. There is no penalty for forming a business now, while anticipating that your actual services will not start until fall.
- This economy is the true test of your business’s resilience.
Forming a business during a pandemic or potential recession is the true test of whether your company will succeed. Your business will have to be lean and come up with creative solutions to flourish.
- Interest rates are extremely low.
If you need capital to fund your business, the current low interest rates are a huge advantage. Obtaining a business loan with a small amount of interest payments can help you grow your revenue.
Cons of Starting a Business
- There might not be a market for your business.
Depending upon the type of business or services offered, you may not have a market currently for your business. For example, if your business depends upon interacting with people in person such as tailoring, you may not be permitted to do so with the shut down in effect.
- Other businesses may be drowning.
With this pandemic, businesses have to make difficult decisions and cuts. Some businesses are seeing their sales decrease dramatically and therefore need to cut personnel. Others may even have to file bankruptcy. This does not always create confidence for new businesses. Supply chains may also be impacted or even disrupted.
- Financial resources may be limited or highly competitive.
With a potential recession headed our way, there may be fewer financial resources to form your business. There may also be more competition to obtain those financial resources. Additionally, many of the pandemic-centered resources are limited to businesses with previous-years’ financials, and some banks even require formation prior to a certain date to be considered eligible for the government subsidies.
Legal Entity Types
There are various types of legal entities that offer both benefits and draw-backs for different business models, and ownership treatment. The following are the three most-used entities:
A partnership simply requires the agreement of two or more people to enter into a business. Best practice with this type of entity is to have a formal written partnership agreement which sets forth the governance and other business terms. There are generally two types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have the same liability – each is fully liable for all acts of the partnership. With a limited partner, the liability is not the same. The partner which is nominated as the managing partner has the authority and control over the business, whereas the limited partner generally does not have a lot of interaction with the day-to-day operations. But limited partners are protected from partnership debts, so there is a give and take.
A corporation is the most traditional legal entity. Many of the biggest companies in the world have formed as a corporation—a legal entity which allows for trading on a stock exchange. There is a strict structure of governance including an executive team who makes and runs the day-to-day operations and a board of directors which make the big business decisions of the corporation. The shareholders have no liability for the corporation’s debts, and this type of entity allows for more competitive employee benefits (ex; Stock plans). There are certain tax implications for corporations, the biggest being “double-taxation”. This means that the corporation has a tax, and any money distributed to the shareholders is also taxed. There is a vehicle to only have the tax incurred once at the shareholder level, and this is called the “S-election” or an S-Corporation. There are strict requirements for a corporation to qualify as an “S-Corp,” including less than 100 shareholders.
Limited Liability Company
This is generally the most common start up entity. An LLC blends various forms of other entities, and is effectively a hybrid of corporations and partnerships. There is the more fluidity, and direct governance ability similar to a partnership, but a member’s liability for the LLC is limited to their initial investment in the entity, similar to a corporation. Any profits and losses of the LLC are passed through and are listed on the member’s personal tax return. This type of entity is particularly attractive for startup entities because it is less expensive to set up, but does offer protections from liability.
If you have questions about startups, need more information about which type of entity best suits your business, or are ready to form your business entity now please contact us. We are happy to help.