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Chapter 2. First Steps > Choose a Business Entity - Pg. 17

First Steps 17 Who has the Final Word? Ownership bears two primary benefits: profits and control. While the two are often intermingled, they can be separated if it suits the owners. This may be desirable where a party wishes to make a passive investment (an investment not accompanied by significant effort in the venture, such as employment) and does not want to exercise control in the venture. Different owners have different preferences: a cash investor will probably be more interested in return on investment, while a sweat equity investor may be more concerned with control. How is control exercised? The answer to this question varies with entity type. Each business entity has its own prescribed method of control and management of the business, described below. For example, a corporation divides control among three groups: the shareholders, the directors, and the executives. Shareholders elect directors for a term. Directors hire and fire executives. A founder seeking control would be well advised to have not only ownership of shares, but a voting agreement guaranteeing him one (or more, which he can fill with an ally) seat(s) on the board, particularly if he is an executive. It is important to match the dynamics of your founding group (if indeed there is more than one founder) to the management mechanics of the entity. Be aware that you may not be granted the final say in a company simply by virtue of owning the largest stake in the venture. Every business entity (covered in detail below) has some mechanisms by which minority owners can restrict the majority's ability to take certain actions (such as terminating the minority owner, or the majority owner's selling his or her stake to an outsider). Note CAUTION In some respects, the most important negotiations are not overmoney but over the provi- sions ofthe agreement governing relationsamong the business owners.Theseare covered