5 Types of Business Ownership

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So, you’re ready to start your own business; there’s no lack of ideas or passion, but have you decided on the type of business ownership? How you structure your business is important in terms of efficiency, taxes, and benefits. Since there is no such thing as one size fits all in business ownership, it’s crucial that you understand the pros and cons of each type so you can make the best decision.

Even for small businesses, there are 5 types of business ownership to consider. You can start planning the structure of your business when you understand the advantages and drawbacks of a sole proprietorship, partnership, corporation, S corporation, and limited liability corporation.

Sole proprietorship

A sole proprietorship is the easiest business structure to create. As the name suggests, it is owned and operated by a single individual. With a sole proprietorship, there is no separation between the owner and the business, and it is not considered a legal entity. The only steps a sole proprietor needs to take are to register their name and obtain a local license.

Pros:

  • Established quickly and inexpensively
  • No need to pay unemployment tax on his or herself
  • Owners may freely mix business and personal assets
  • Little to no restrictions

Cons:

  • Owner is liable for all debts and legal suits
  • Owners cannot raise capital by selling interest in the business
  • If the owner becomes incapable of running a business, there is a very low chance of its survival

Here’s an in-depth look at sole proprietorships.

Partnership

Partnerships are similar to sole proprietorships, except at least two or more people come together to form the business. Ideally, each partner contributes money, labor, skill, or property in order to share in the profits and/or losses of the business and are individually taxed accordingly.

Pros:

  • Shared burden of liability
  • Added value, additional knowledge
  • Easy to start (modeled like sole proprietorship)

Cons:

  • Cannot act independently, always consider your partner
  • If run on an informal agreement, partnerships struggle with interpersonal issues
  • Shared burden of liability is also a con – if partner skips town or slacks, you’re still responsible for business

Is a partnership right for you?

Corporation

There are multiple types of corporations in business ownership, but generally speaking, a corporation is a legal entity that is separated from the individual owners. A group of people, or the owners, form a company and own shares in the company’s ownership. These shareholders control the company and can dictate who runs the company and how its business is conducted.

Pros:

  • The separation between corporation and shareholders, meaning the owners do not face liability, but the company, as a legal entity, does
  • Easier to raise capital than a sole proprietorship or partnership
  • Owners receive profits based on the number of stocks that they own
  • If a shareholder leaves, the business most likely remains unaffected

Cons:

  • More costly – there are administrative fees, tax, and legal requirements
    • Corporations are required to pay income tax and are sometimes double taxed (on profits and then again on distributed dividends)
  • Slower to act because it requires input from multiple people

S Corporation

S Corporations vary slightly from standard corporations. Essentially, they avoid double taxation. The profits, losses, and taxes are passed on to the shareholders instead of the business entity. This way, the taxes are represented in the shareholders’ personal tax returns, and the profits are no longer taxed through the business.

Pros:

  • No double taxation
  • Liability protection
  • Simple transfer of ownership

Cons:

  • Not possible with more than 100 stakeholders
  • Not possible if a stakeholder is not a US citizen
  • Not all states comply and require the double taxation, so where you file is important

Limited Liability Corporation

A limited liability corporation, or LLC, is a combination of a corporation and partnership (or sole proprietorship). This type of business ownership is simple and quick to get started, but the owners are not personally liable for debts and liabilities.

Pros:

  • Limited liability, you are not personally liable, the company as an entity is
  • Easy to create
  • Ability to change tax structure – LLCs can choose how they want to be taxed
  • No restrictions on the number of partners

Cons:

  • LLCs are fairly new, so there is a higher chance of running into an unprecedented problem
  • Licensing and filing fees
  • Additional tax forms
  • Difficult to raise capital from outside investors

The Bottom Line of Business Ownership

As you now know, there are many nuances between the different business structures. One of the most important items to consider is liability. What type of product or service are you offering? Maybe you personally want to be legally protected, especially if you are selling something that could cause harm. Taxes are the other large consideration, followed by how much control of your business you’re willing to let go of. Which type of business ownership do you see your company modeled as?

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