One of the first thought that comes in your mind when you think of starting a business is how the business should be structured. This decision will have long-term implications, so in making a choice, you should consider these following factors:
- The size and nature of your business.
- The level of control you wish to have.
- The level of structure you are willing to deal with.
- The business vulnerability to lawsuits.
- Tax implications of the different corporate ownership structures.
- Expected profit (or loss) of the business.
- Whether or not you need to reinvest earnings into the business.
- Your need for access to cash out of the business for yourself.
Business ownership comes in many forms based on the number of owners, the liability of the owners, representation, and motives. These are –
1. Sole Proprietorship – The vast majority of small businesses start out as sole proprietorship. It is the simplest type of business. Sole proprietorship are owned and operated by a single person and are very easy to set up, operate, and register. It is the least costly among all forms of ownership and all the profits generated by the business belong to the owner but the owner also faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them.
2. Partnership – When two or more persons join hands to run a business, they usually come into partnership. Like proprietorship, the law does not distinguish between the business and its owners. The partners should have a legal agreement that already sets how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to break the partnership when needed because many partnerships split up at crisis times, and unless there is a defined process, there will be even greater problems. They also must decide up-front how much time and capital each will contribute, etc.
Partnerships come in two forms – general and limited. A general partnership is like sole proprietorship but with more than one owner where all the owners face unlimited liability. In limited partnerships, some or all of the partners have limited liability which means creditors cannot go after the personal assets of the limited partners.
3. Corporation – One of the most complex business types. A corporation is a business organization that has a separate legal personality from its owners. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. They enjoy limited liability but also have limited involvement in the company’s operations. The board of directors, an elected group from the shareholders, controls the activities of the corporation. The corporation has a life of its own and does not dissolve when ownership changes.
4. Limited Liability Company – A limited liability company (LLC) is a hybrid form of business (a mixture of a partnership and a corporation). An LLC is not incorporated; hence, it is not considered a corporation. But, the owners enjoy limited liability like in a corporation. An LLC may elect to be taxed as a sole proprietorship, a partnership, or a corporation. Limited Liability Company is one of the most popular business types for start-ups. It is designed to make it easier to start small businesses as it provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued, if desired, by a vote of the members at the time of expiration.
LLCs must not have more than two of the four characteristics that define corporations:
- Limited liability to the extent of assets
- Continuity of life
- Centralization of management
- Free transferability of ownership interests.
5. Cooperative (Co-op) – Cooperative is a private business organisation owned and controlled by people for their mutual benefits. These people are called members and are benefitted by the goods and services offered by the cooperative. All members are expected to help run the business as the main motive of the cooperative is to provide service to all the members rather than a return on investment.
At the end, you will be deciding the best suits ownership for your business but make sure that you give careful consideration and choose the right one.