There are many things to do when starting a new business, and one of them is choosing the right business structure. Mind you, a business structure depends on the type of ownership. In this post, we will explain the different types of business ownership and the pros and cons of each.
The type of business structure has significant effects on many factors. For instance, the amount of taxes the business will pay and the availability of capital investment largely depends on the business structure.
The ownership and structure of a business also determine the amount of liability the owners can take responsibility for, and the amount of paperwork that must be processed before a company can start running.
Now, let’s look at the 5 different types of business ownership and the pros and cons of each.
1. Sole Proprietorship
A sole proprietorship is a type of business that is owned and operated by one individual; the owner.
The owner of a sole proprietorship does not need to take permission or approval from board members or partners before making management and financial decisions.
Sole proprietors can also decide what and what to not do with their profits. Also, they can close and reopen the business whenever they want. However, there are advantages as well as disadvantages.
Advantages of the sole proprietorship type of business ownership
- The owner has complete control over all assets
- It’s easier and faster to start since less paperwork is needed
- The owner is in charge of all business decisions
- It’s easier to file taxes
Disadvantages of the sole proprietorship type of business ownership
- The owner is solely responsible for raising capital
- Such a person will be solely responsible for all business losses
- There is no distinction between the business and personal assets of the owner. In case of bad debt, the owner may have to settle by selling his/her personal properties
- It can be more difficult to sell the business
- An injury or death of the owner can cause the business to close down
A partnership is a type of business ownership in which two or more owners run a business. The joint owners can run the day-to-day activities by themselves or hire employees.
In the partnership type of business ownership, the owners will sign a formal agreement when starting the business. This document will clearly show the identity of all partners, as well as their responsibilities and shares.
The partnership type of business ownership is subdivided into two.
Limited liability partnership
In a limited liability partnership, a partner won’t take responsibility for losses caused by another partner. This means that if Partner A is in bad debt, Partner B’s assets can’t be seized or sold to pay for it.
Unlimited liability partnership
In this type of business ownership, all the partners are responsible for the business. If an action by one partner causes a debt, all the other partners must pay for the loss, even though they are not responsible for it.
Advantages of the partnership type of business ownership
- The startup costs and capital investment can be shared among the partners
- Division of labour is more easy in a partnership set-up
- The business doesn’t have to close down in the event of a partner’s death
Disadvantages of the partnership type of business ownership
- Partners may have to take care of financial losses caused by a fellow partner (if it’s an unlimited liability setup)
- No specific partner has absolute control, as decisions are made jointly. This means that no one can claim ownership of the business, even if they handle a larger part of the company
- In a partnership business structure, there’s always room for conflict
3. Limited Liability Company (LLC)
In a limited liability type of business ownership, the owner’s business and personal assets are legally seen as two separate human beings.
If the company enters bad debt and goes bankrupt, the owner’s personal properties (like house, car, etc) can’t be used to settle it.
Public Limited Company
A Limited Liability Company (LLC) can also become a Public Limited Liability Company (PLC) whenever they want to sell its shares on the stock exchange market.
Advantages of the LLC type of business ownership
- The business can make use of different tax structures
- It’s also eligible for tax deductions, in cases of business losses
- The owners are not responsible for the business liability, as their business is separate from their assets. The only thing they can lose is the capital they invested at the beginning of the business
Disadvantages of the LLC type of business ownership
- It’s more expensive to start this kind of business
- A lot of paperwork is involved, unlike sole proprietorship
- Salaries and profits will also be taxed
A cooperative business is privately owned by the same people that benefit from it. The owners of a cooperative business are also the shareholders.
All members run the business, but they can elect certain board members to handle management decisions. There is no limit to the number of owners or shareholders in a cooperative business.
The profit is shared depending on the shareholdings of each owner.
Advantages of a cooperative type of business ownership
- There’s nothing like sole control in a cooperative business. All members have equal rights to make decisions
- People with the same cause can easily form this type of business ownership and benefit from it
- A cooperative business has lots of funding opportunities, unlike sole proprietorship
Disadvantages of a cooperative type of business ownership
- Since there are many owners, business decisions can be very slow
- There is less profit for angel investors and venture capitalists since many people are involved
Nonprofit corporations exist solely for charity purposes. They make no profit because they exist to serve the common good.
Advantages of Non-profit Corporations
- They do not pay any taxes on their income
- This type of business ownership is like a limited liability company. The personal assets of owners are protected
- They have many funding opportunities like public fundraising and donations
- There are no taxes on donations
Disadvantages of Non-profit Corporations
- High startup capital
- The business may be regularly reviewed and questioned on how funds are spent
- Approval of tax exemptions may take longer than expected
Benefit corporation (B Corps)
This type of business ownership is similar to a non-profit organization in some ways since it also provides services that benefit the company.
However, the owners also want to earn a profit.
Advantages of the Benefit corporation type of business ownership
- Investors that are interested in making an impact on the society often invest in this kind of businesses
- Owners can do serve humanity while also making a profit
Disadvantages of the Benefit corporation type of business ownership
- They may not be eligible for tax exemptions
- Stricter policies apply to B Corps businesses
The ownership of a close corporation is made up of a limited number of shareholders. These shareholders are also involved in the running of the business.
If any of the shareholders want to sell their share of the company stock, they can only sell to their fellow shareholders. They can’t sell to or bring in a third party into the business.
A close corporation is also known by other names, such as a “privately held company,” “private company” and “family corporation.”
A C corporation is a privately owned business, but it has no limits regarding the number of shareholders. Owners are taxed separately from the business, which means that they pay two taxes; personal taxes and company taxes.
The company taxes will be deducted from the business profits before it is distributed to the owners as dividends.
Choosing a type of business ownership is a very important step in starting a business. There are many options, but each one has its benefits as well as limitations.
Read this post once again to help yourself in choosing the right type of business ownership for your startup.