Choosing a type of business ownership is one of the most important decisions to make when starting a business. There are multiple options, each with its benefits as well as limitations.
In this post, you will learn the 5 different types of business ownership and the pros and cons of each.
Types of Business Ownership
1. Sole Proprietorship
This is the type of business that everyone is already familiar with. The woman running the shop down your street is a sole proprietor. Same for your neighbourhood barber and his friend selling fast food.
A sole proprietorship type of business ownership is the most simple and easy to run. However, it also comes with some risks.
Advantages of Sole proprietorship
- The business owner has the ultimate control over all business assets and revenue
- It’s the easiest and fastest type to start
- Your ownership can’t be challenged
- The business owner can not be taxed twice, as the personal and business assets are merged
Disadvantages of Sole Proprietorship
- Startup capital and other investments might be difficult to raise
- If the business fails, the business owner will have to bear all lose
- In the event of bankruptcy, the business owner will have to sell off his/her personal properties to settle the debt
- The business may find it hard to continue after the death or absence of the owner
In a partnership business, two or more individuals are involved. Mind you, they don’t need to have equal shares.
The partnership type of business ownership is of two types.
Limited Liability Partnership
In a limited liability partnership, a partner can’t take responsibility for a loss incurred by another partner.
If the partner’s action causes the business to close down or bankrupt, the other partners can only lose the capital they invested.
Unlimited Liability Partnership
In an unlimited liability partnership, each and every one of the partners are equally responsible for the business. If one of the partners causes a loss, all the other partners will pay for it, even though they’re not directly responsible.
Advantages of the partnership type of business ownership
- It’s easier to get startup investments
- Division of labour is very easy
- If one of the partners dies, the business will still carry on
Disadvantages of the partnership type of business ownership
- No specific partner can claim ownership of the business
- Partners must settle liabilities, no matter the partner responsible for it
- Since multiple people are involved, disagreements will happen from time to time
3. Limited Liability Company (LLC)
A limited liability company offers more legal protection than sole proprietorship and unlimited liability partnership.
If the business incurs a bad debt, the personal assets of the owner(s) are protected and can’t be used to settle it. The law treats the personal properties of the owner(s) as a separate human being.
Advantages of a Limited Liability Company (LLC)
- The business can use many tax structures
- It is also eligible for tax deductions, in cases where there are major losses
- The owners and shareholders cannot be held responsible for liabilities
Disadvantages of a Limited Liability Company (LLC)
- This type of business ownership is more expensive to start
- Investors may be afraid to invest, as other partners and shareholders can’t refund the money if the business fails
- Self-employment taxes also apply to profits and salaries
A cooperative is a privately-owned business. The owners and shareholders are the same people who benefit from it. Everyone in a cooperative business has a say in the decision-making process.
In a cooperative type of business ownership, there’s no limit to the number of owners.
Advantages of Cooperative Businesses
- It’s very easy to get capital investment
- Each shareholder has democratic rights
- People with the same background, ethnicity, religion, academic prospect or cause can easily form this type of business ownership
Disadvantages of the cooperative type of business ownership
- Many owners are involved. As a result, it may take a longer period to make certain decisions or reach agreements
- Many shareholders are involved. This means fewer profits, as the profits will be shared among all
There are many types of Business Corporations, each one having its Pros and Cons.
This is a privately-owned business that is allowed to have an unlimited number of shareholders. Note that owners are taxed separately from the business.
Advantages of a C Corporation
- The business can get investments by selling part of the company stock
- The liabilities of the business cannot become the debt of any shareholder
Disadvantages of C Corporation
- The business pays an income tax on all profits
- Strict record-keeping is required for this type of business ownership.
The owners and shareholders of a close corporation are limited and closely involved in that business.
If one of the shareholders wants to exit the business, he/she can only sell his/her shares to a fellow shareholder. Outsiders are not allowed to own stock in that company.
A close corporation is also known as a “privately held company,” “private company” or “family corporation.”
Advantages of a Close Corporation
- Everyone knows each other, both professionally and personally
- The personal assets of the owners are protected
- The owners have more freedom, as there’s no pressure from public shareholders
Disadvantages of a Close Corporation
- The company stocks can be sold publicly or to outsiders
- Each shareholder and owner has more responsibility
This is a type of company that exists to further a cause and serve humanity. It has no aim to make a profit.
Advantages of Non-profit Corporations
- All the personal assets of the owners are protected
- Such companies are eligible to receive government grants
- There are many funding opportunities
- Taxes can not be deducted from donations
Disadvantages of Non-profit Corporations
- This type of business requires a high startup cost
- There will be very strict rules and reviews on how funds and donations are spent
Benefit Corporation (B Corps)
Unlike non-corporations, a benefit corporations serve humanity while also making profits.
Advantages of Benefit Corporations
- Investors are motivated to invest since there will be some profit
- Such companies can gain connections with similar companies
Disadvantages of Benefit Corporations
- Certifications are very expensive
- There are very strict rules to be followed if the company wishes to continue existing
The Bottom Line
It’s important to choose a type of business ownership that benefits your business.
And remember, your type of business ownership also determines the structure and some other things, such as the amount of taxes, protection of personal properties and many more.