Four Types of Business Ownership
By: Pramod Manohar
1. Sole Proprietorship
Type of business entity that is owner and run by one person and in which there is no legal distinction between the owner and business. The owner holds all the liability and controls all aspects of the company. Some examples of a sole proprietorship are a self-employed worker or an independent contractor.
- Owner has complete control and decision making power.
- Sale or transfer takes place at the discretion of the owner.
- No corporate tax payments and minimal legal costs.
- Few formal business requirements.
- Owner can be held personally liable for debts and acts of employees from the company.
- Investors don't usually invest in sole proprietorships.
- Hard to raise money.
- Heavy burden on the owner.
- Obtain Federal Employer Identification Number.
- Obtain local tax registration certificate.
- Obtain a permit to sell the type of product being sold.
- File for the DBA.
- Obtain a business license.
- Almost all small businesses start as sole proprietorships.
- Sole proprietorships are among the easiest and least expensive businesses to run.
Type of business entity in which two or more people share ownership of a business. Each partner contributes to all aspects of the business, such as money, property, and labor. In return, each partner shares the benefits and losses of the business. An example of a partnership are two doctors sharing an office space for their own, separate practices.
- Easy and inexpensive.
- Shared financial commitment.
- Complementary skills.
- Partnership incentives for employees.
- Joint and individual liability. All owners are responsible for actions of the other owners and the employees.
- Disagreements between partners.
- Shared profit between the owners.
- No formal documents with the government are needed.
- Written out agreement between partners are mandatory.
- There are two types of business partnerships. Limited and unlimited.
- In limited partnerships, the owners are not responsible for the daily activities of the business and not liable.
- In unlimited partnerships, the owners are responsible for running the business and are liable.
3. Limited Liability Partnership (LLP)
Type of business entity in which some or all partners have limited liability. Exhibits elements of a partnership and a corporation. In this type of business, one partner is not responsible for the actions of the other partners. An example of a limited liability partnership is two doctors who try to avoid being involved in another's lawsuit.
- Limited paperwork.
- Less liability between partners.
- Tax flexibility.
- Easier management than corporation.
- Allows more flexibility in terms of sharing profit and losses.
- Self-employment taxes.
- Confusion about roles.
- Limited life if a partner dies.
- Only available to some professions due to restriction by the state.
- Choose a business name that is different than any other LLC business.
- File the Articles of Organization.
- Create an operating agreement (mandatory in some states).
- Obtain licenses and permits for products and goods being sold.
- Provides a good combination of flexibility and protection over the business.
- Limited partners don't run the business as much as a general partnership.
Type of business entity which is owned by the shareholders of the company. Thus, the corporation owns itself. The shareholders are liable for any debts in the company. An example of a corporation is an automobile company.
- Corporations may deduct the benefits of employees and officers.
- Corporations are able to raise additional funds by having more shares in their economy.
- Additional capital is easy to raise through stock markets.
- If owner dies, corporation still exists.
- Requires more time and money to establish than any other business model.
- Government agencies monitor corporations which increases amount of paperwork.
- Double taxation in corporations.
- All corporations are required to register for an Employer Identification Number.
- Corporations must obtain the proper licenses and permits
- They must follow the labor laws and industry regulations.
- Responsible for following federal tax obligations.
- Corporations are among the largest and hardest businesses to run.
- Shareholders are vital for the corporation being successful.