Owning a business is an endeavor that comes with both potential rewards and risks. With starting a new business, one important decision is to choose a type of business structure. Each business ownership type provides unique pros and cons that are weighed in the decision.
When entrepreneurs know the fundamental differences in each ownership type, they align their business planning and intentions with their personal and professional aspirations, with a plan that can grow and adjust in the future.
What Is Business Ownership?
Business ownership is a legal structure that explains about the owner of a business and a number of operational aspects. Business ownership says the rights and responsibilities, along with financial liabilities. Choosing the right structure of business ownership is critical in creating not only the legal structure, but also how the company will function effectively, follow business ethics, be successful.
Types of Business Ownership
- Sole proprietorship
A sole proprietorship is the simplest form; a single person owns the business to runs it successfully. With a sole proprietorship, an individual can make all decisions and retain all profits while taking on personal liability for debts and losses in the business. It is easy to establish and dissolve, so it is a famous form of individual entrepreneurs.
Pros
Easy to establish with little paperwork.
One has complete control of the company and makes all of the final decisions.
Cons
One person is responsible for all debts.
Can be personally liable if the business is sued.
- Partnership
Partnership means that two or more individuals own a business. Partnership types are:
General Partnership – All partners contribute money and are responsible for the debt of the business. It is usually not necessary to have a formal partnership agreement, and it can be verbal among business owners.
Limited Liability Partnership, LLP, protects each partner from the debt of the other partner(s).
- Limited liability Company
Here, the owner’s assets, such as cars, house, personal accounts, etc, are protected, even if the business goes bankrupt. This corporation type is a good option for a small business owner starting a new business. It also needs to adopt keenly observed business management strategies to drive success.
Pros
Flexibility for adopting different tax structures
The possibility of obtaining tax deductions for business losses.
Cons
Potentially difficult to raise funds for this type of business.
It may cost more to incorporate than some other business forms.
- Public limited company
A Public Limited Company (PLC) is an entity separate from the owners and managed and owned by directors and shareholders. The difference is that a public limited company can provide shares to the public by listing on a stock exchange.
Pros
It can help you secure investment at a faster rate.
Here, the owner may have less liability.
Cons
Include more regulations and policies.
You may lose some control of the business.
- Private Corporation
In a private firm, individuals come together to form a group and run a business. This form also separates assets and liabilities from the owners. If there is a loss, the owners only have the amount invested. Founders of a corporation will generally file a document called articles of incorporation in the state in which they are doing business or where they incorporate.
Pros
Here, there is no restriction on providing financial information to the public.
Owners have less liability exposure.
Cons
Capital marketing has limited access.
Shareholders’ number is greater and thus has less control over the business.
- Nonprofit Corporation
A non-profit corporation is created solely for interests other than profit. This corporate income, in some is not directed to owners or members.
Pros
Attracts employees and volunteers who want a job that aligns with the non-profit’s purpose.
These organizations pay no corporate income taxes if they can comply with some criteria.
Cons
Finding funding for projects is complicated.
Such organizations can face tremendous pressure from stakeholders.
- Cooperative
A cooperative is a unit that is privately operated and owned by people who are benefited. The owners are shareholders who have a voice in the decision-making process. The number of shareholders can be unlimited. These members elect a person to handle the business.
Pros
Membership inculcates equal rights in the decision-making process.
Members come together for a common opinion.
Cons
Less interest is paid to angel investors and venture capitalists.
The time taken for decision making is longer.
- Other Forms
There are also entity forms known as franchises, government enterprises, Benefit Corporation, close corporation, C Corporation, S corporation, etc. They all have specific operation-minded goals and regulatory conditions depending on the entity plan.
How to choose Business Ownership
The right ownership form in entrepreneurship is chosen with certain key parameters.
- Corporations provide more reliability and safety, while sole proprietorship imposes unlimited liability personally for the owner. Acceptance of the personal financial exposure level is tolerated.
- Corporations are also subject to double taxation on profits and dividends, while Limited Liability Company, Partnerships, etc, and offers a pass-through taxation system.
- Corporations have financial benefits as they can easily raise funds and capital. Hence, it helps in handling financial risk efficiently and business growth.
- Ownership forms in corporations and larger firms include more formalities and high-end setups, which can be done cost-effectively in a sole proprietorship.
Thus, by now, you have understood what the different types of business ownership entail, with their pros and cons. This helps you in analyzing and choosing the most appropriate structure for your new firm.
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