Types Of Business Ownership Structures
Entrepreneurs starting a new business have many decisions to make. One of them is to decide which type of business ownership is most viable for them. There are several types of business ownership which include:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Company
- Corporation (S Corporation, and C Corporation)
It is possible for you to change the structure of your business in the future if you wish. However, before you begin, there are several factors that entrepreneurs need to consider before registering their businesses, these include:
- Risks and liabilities that your business is exposed to
- The cost and legal implications involved in setting up a particular type of business
- Need to attract investment opportunities in the future
- Your Income Tax situation
Types of Business Ownership for SMEs
This is by far the most common type of structure favored by small businesses. According to the Small Business Association, 7 out of 10 businesses in the United States are sole proprietorships. Many entrepreneurs choose this type of business because the cost associated with this type of business are very low. It requires very little paperwork and compliance to legal requirements. Depending on the jurisdiction you are in, you may not be required to file any paperwork at all.
However, the main disadvantage with a sole proprietorship is that the business and the owner are one and the same thing. You’ll have to personally handle all the liabilities of the business. For example, if you are sued by one of your customers your personal belongings such as your house can be sold off to pay the debts. Additionally, sole proprietorship are often not eligible for business loans. You may need to take a personal loan to fund your business activities. This is a suitable structure for those who want to start a small business that will not grow beyond themselves.
This is a structure where two or more individuals or corporations decide to work together in partnership. The partners in this form of business structure share the profits and are personally liable for the obligations of the enterprise. A written agreement defines the structure and the manner in which profits are distributed.
The main advantage of this type of business is that it is easy to set up and requires little paperwork just like a sole proprietorship. More partners increase your chances of getting capital for your business. Your partners may also bring in their skill and experience. However, you’ll have to share the losses and liabilities that result from the actions of one of the partners.
Business Structures with Limited Liability
This type of liability consists of at least one general partner and one or more limited partners.
- General Partners: They have unlimited liability in the company. They share the losses and liabilities as is the case with general partnership structure. They also help to manage the business.
- Limited Partners: They are not involved in the managing of the business. Their liabilities are limited only to what they have contributed.
Limited Liability Company (LLC)
The LLC is the best structure for small and medium sized businesses that want to limit their liabilities. Business owners, partners, and shareholders of the business can enjoy the benefits of being in a partnership while enjoying the tax benefits of this type of business structure. An LLC may be more suitable for partnerships as you can protect yourself from the actions of all your business partners. It is also ideal if you wish to convert your business to an S corporation later.
Types of Corporations
If you want to start a business with an ownership structure that limits the liabilities of the owners you should consider starting a corporation. A corporation is a separate business entity owned by shareholders. If the shareholders ensure that the business is run as a separate business entity there will be no obligations on shareholders.
- The business entity is taxed separately from its owners
- It can continue to exist even when all owners are replaced
- Can have an unlimited number of shareholders
- Tax is charged on individual dividends and again on the corporate profit
- An S Corporation is also a separate business entity owned by shareholders
- Unlike a C Corporation, you can avoid double taxation since the taxes apply to the dividends only
- No federal tax on the earnings except a 1.54% tax on net income that S corporations are obliged to pay yearly