If you are starting or buying a small business, your personal savings can be an important resource. You can use this money to invest in your new business or you can use it to pay your living expenses during the early stages of your business venture. It's also a good idea to keep some money as a cushion in case you have to pay unexpected expenses.
Investing in Your Business
If you are going to invest some of your savings in your business, the first thing to consider is what kind of organizational form your business will have. There are basically three forms of business organizations: sole proprietorships, partnerships and corporations. These forms each have their own characteristics, which can affect how you will use your savings to support your new business.
Sole Proprietorship
In a sole proprietorship, you, the sole proprietor, own the business. You own the assets of the business, unless you lease or borrow them from someone else, and the business is run in your name. You should consider using some of your savings to purchase the equipment that you need. That way, when you combine your labor with your equipment, you will produce a product, which you can sell and generate revenue. You can spend some of your savings on leasing the space in which you will conduct your business. You can also use your savings for advertising in order to inform the public that you are in business and to attract customers.
Partnership
The second business organizational form is a partnership. You can spend your savings on equipment, business space and advertising, just like in a sole proprietorship, but you should be spending your savings in proportion to the contributions of the other partners or in proportion to your percentage share of the partnership revenue. For example, if you and three associates form a partnership, you should contribute one-fourth of the capital needed to get the partnership going and you should receive one-fourth of the income of the partnership. If your contribution is more than one-fourth, your share of the income should reflect that. However, before you start contributing your savings to the partnership, you and your partners need to have a partnership agreement drafted by an attorney. You should spend some of your savings on legal services to set up your business properly and to protect your investment.
Corporation
The third business organizational form is a corporation. You will need a business lawyer to draft your new corporate documents and to incorporate your business. You should spend some of your savings on obtaining good legal advice in the beginning so that you organize your business properly. You can contribute some of your savings to the capital of the small corporation in exchange for shares of stock in the corporation, membership on the board of directors, and a position as a corporate officer. All of the financial arrangements should be described in the corporation's charter or articles of incorporation, which are some of the documents needed for the formation of a corporation. Another way in which you can use your savings is to purchase equipment or real property and lease it to the corporation. That way the assets will be in your name, and you will be compensated for their use by the corporation
Questions for Your Attorney
- How should a sole proprietor use his or her savings when setting up a new business?
- What documents are needed for forming a partnership?
- What is my role in my new business if it is set up as a corporation, and what is the nature of my investment if I use my savings to support the business?