4 Types of Business Ownership: What You Need to Know
If you are thinking of starting a business, you need to consider what type of ownership structure best suits your needs. There are four main types of business ownership: sole proprietorship, partnership, corporation, and limited liability company (LLC). Each one has its own advantages and disadvantages, as well as legal and tax implications. In this article, we will explain the main features, benefits, and drawbacks of each type of business ownership, and help you decide which one is right for you.
Sole Proprietorship
A sole proprietorship is the simplest and most common type of business ownership. It is a business that is owned and operated by one person, who is responsible for all aspects of the business. A sole proprietor has complete control over the business decisions, profits, and losses. However, a sole proprietor also bears all the risks and liabilities of the business. This means that if the business fails or faces a lawsuit, the sole proprietor’s personal assets, such as bank accounts, car, or house, can be seized to pay off the debts or damages.
Some advantages of a sole proprietorship are:
- Easy and inexpensive to start and run
- No need to register with the state or pay any fees
- No need to file separate tax returns for the business
- Full freedom to make business decisions
Some disadvantages of a sole proprietorship are:
- Unlimited personal liability for the business debts and obligations
- Difficulty in raising capital or obtaining loans
- Lack of continuity if the owner dies or retires
- Limited skills and resources to manage the business
Partnership
A partnership is a business that is owned and operated by two or more people who agree to share the profits and losses of the business. A partnership can be either general or limited. In a general partnership, all partners have equal rights and responsibilities in managing the business, and are personally liable for the debts and obligations of the business. In a limited partnership, there are two types of partners: general partners, who have the same rights and liabilities as in a general partnership, and limited partners, who only contribute capital and have no say in the management of the business, but also have limited liability.
Some advantages of a partnership are:
- Easy and inexpensive to form and run
- No need to register with the state or pay any fees
- No need to file separate tax returns for the business
- Ability to pool skills, resources, and capital from multiple partners
Some disadvantages of a partnership are:
- Unlimited personal liability for the general partners
- Potential conflicts and disagreements among partners
- Difficulty in transferring or terminating the partnership
- Lack of continuity if a partner dies or withdraws
Corporation
A corporation is a legal entity that is separate from its owners, who are called shareholders. A corporation has its own rights and obligations, and can sue and be sued, own property, enter contracts, and issue shares. A corporation is managed by a board of directors, who are elected by the shareholders, and who appoint officers, such as president, vice president, secretary, and treasurer, to run the day-to-day operations of the business. A corporation can be either public or private. A public corporation is one that sells its shares to the general public through a stock exchange, while a private corporation is one that does not.
Some advantages of a corporation are:
- Limited liability for the shareholders
- Ability to raise capital by selling shares or issuing bonds
- Continuity of existence regardless of changes in ownership
- Professional management by qualified officers
Some disadvantages of a corporation are:
- Complex and expensive to form and maintain
- Need to register with the state and pay fees and taxes
- Need to file separate tax returns for the corporation
- Double taxation of profits (corporate tax and personal income tax)
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid type of business ownership that combines some features of a corporation and some features of a partnership. An LLC is owned by one or more members, who can be individuals or other entities. An LLC can be managed by its members or by appointed managers. An LLC has limited liability for its members, meaning that they are not personally responsible for the debts and obligations of the business. However, an LLC also has flexibility in how it is taxed and how it distributes its profits and losses among its members.
Some advantages of an LLC are:
- Limited liability for the members
- Flexibility in choosing how to be taxed (as a sole proprietorship, partnership, corporation, or S corporation)
- Flexibility in allocating profits and losses among members
- No need to file separate tax returns for the LLC
Some disadvantages of an LLC are:
- Complex and expensive to form and maintain
- Need to register with the state and pay fees
- Lack of uniformity in state laws governing LLCs
- Possible self-employment tax for the members
Choosing the right type of business ownership is an important decision that can have significant implications for your legal rights, tax obligations, and financial success. There is no one-size-fits-all solution, as each type of business ownership has its own pros and cons. You should consider factors such as your personal goals, risk tolerance, capital needs, management style, and tax situation before deciding which type of business ownership is best for you. You should also consult with a lawyer, an accountant, or a business advisor to get professional guidance and advice.
Four Types of Business Ownership
Business ownership refers to the legal structure of a company and how it is organized and taxed. There are four main types of business ownership: sole proprietorship, partnership, corporation, and cooperative. Each type has its own advantages and disadvantages, depending on the goals and needs of the business owner.
Sole Proprietorship
A sole proprietorship is the simplest and most common form of business ownership. It is an unincorporated business that is owned and operated by one person. The owner has full control over the business and is personally responsible for all its debts and liabilities. The owner also reports the business income and expenses on their personal tax return.
Some advantages of a sole proprietorship are:
- Easy and inexpensive to start and maintain
- Complete autonomy and flexibility
- No double taxation
Some disadvantages of a sole proprietorship are:
- Unlimited personal liability
- Limited access to capital and resources
- Lack of continuity and transferability
Partnership
A partnership is an unincorporated business that is owned and operated by two or more people who agree to share the profits and losses of the business. There are two main types of partnerships: general and limited. In a general partnership, all partners have equal rights and responsibilities in the management of the business and are personally liable for its debts and liabilities. In a limited partnership, there is at least one general partner who has unlimited liability and one or more limited partners who have limited liability and limited involvement in the business.
Some advantages of a partnership are:
- Easy and inexpensive to start and maintain
- Shared skills and resources
- No double taxation
Some disadvantages of a partnership are:
- Unlimited personal liability for general partners
- Potential conflicts and disagreements among partners
- Lack of continuity and transferability
Corporation
A corporation is an incorporated business that is a separate legal entity from its owners, who are called shareholders. A corporation has its own rights and obligations, such as the ability to enter into contracts, own property, sue and be sued, and issue shares. A corporation is managed by a board of directors, who are elected by the shareholders, and run by officers, who are appointed by the board. A corporation can be taxed as a C corporation or an S corporation, depending on its size and preferences.
Some advantages of a corporation are:
- Limited liability for shareholders
- Access to capital and resources
- Continuity and transferability
Some disadvantages of a corporation are:
- Complex and expensive to start and maintain
- Double taxation for C corporations
- Strict regulations and compliance requirements
Cooperative
A cooperative is an incorporated business that is owned and operated by its members, who are also its customers, suppliers, employees, or other stakeholders. A cooperative is based on the principles of democracy, equality, and social responsibility. A cooperative aims to provide goods or services that benefit its members and the community, rather than to generate profits for shareholders. A cooperative can be taxed as a C corporation or an S corporation, depending on its size and preferences.
Some advantages of a cooperative are:
- Shared ownership and control
- Reduced costs and risks
- Social impact and values
Some disadvantages of a cooperative are:
- Complex and expensive to start and maintain
- Double taxation for C corporations
- Potential conflicts and disagreements among members
Global Demand for Different Types of Business Ownership
The global demand for different types of business ownership varies depending on various factors, such as the economic environment, the legal system, the cultural norms, the industry sector, and the personal preferences of entrepreneurs. However, some general trends can be observed based on data from various sources.
According to the World Bank’s Doing Business 2020 report, which measures the ease of doing business in 190 economies around the world, the most common type of business ownership among newly registered firms in 2019 was limited liability company (LLC), followed by sole proprietorship, partnership, joint stock company (JSC), cooperative, public limited company (PLC), private limited company (LTD), unlimited company (UC), closed joint stock company (CJSC), open joint stock company (OJSC), limited partnership (LP), limited liability partnership (LLP), other corporate entity (OCE), other non-corporate entity (ONE), branch office (BO), representative office (RO), subsidiary (SUB), association (ASS), foundation (FND), trust (TRU), mutual fund (MF), investment fund (IF), pension fund (PF), insurance company (IC), bank (BAN), microfinance institution (MFI), non-governmental organization (NGO), religious organization (REL), educational institution (EDU), health care institution (HCI), cultural institution (CUI), sports organization (SPO), trade union (TU), and political party (PP).
The report also shows that the global average time and cost to start a business in 2019 were 20.1 days and 23.1% of income per capita, respectively. However, these figures vary significantly across regions and income groups. For example, the average time and cost to start a business in Sub-Saharan Africa were 32.2 days and 49.5% of income per capita, respectively, while the average time and cost to start a business in OECD high-income economies were 8.5 days and 3.1% of income per capita, respectively.
According to the Global Entrepreneurship Monitor (GEM) 2019/2020 Global Report, which measures the entrepreneurial activity and attitudes of individuals in 50 economies around the world, the most common type of business ownership among early-stage entrepreneurs (those who are either actively involved in setting up a business or have owned a business for less than 42 months) in 2019 was sole proprietorship, followed by partnership, corporation, cooperative, and other. The report also shows that the global average total early-stage entrepreneurial activity (TEA) rate, which is the percentage of the adult population who are early-stage entrepreneurs, was 10.5% in 2019. However, this rate also varies significantly across regions and income groups. For example, the average TEA rate in Latin America and the Caribbean was 18.8%, while the average TEA rate in Europe was 8.1%.
Based on these data, it can be inferred that the global demand for different types of business ownership is influenced by various factors, such as the ease of doing business, the level of entrepreneurial activity, and the availability of resources and support. It can also be expected that the global demand for different types of business ownership will change over time as the economic, legal, social, and technological conditions evolve.
References:
https://academic.oup.com/cjres/article/5/3/307/478940
https://doi.org/10.1080/13600834.2020.1861714
https://www.investopedia.com/terms/p/plc.asp
https://www.doingbusiness.org/en/reports/global-reports/doing-business-2020
https://www.gemconsortium.org/report/gem-20192020-global-report
https://www.sba.gov/business-guide/launch-your-business/choose-your-business-structure
https://www.entrepreneur.com/article/38822
https://www.investopedia.com/terms/b/business-structure.asp
https://www.thebalancesmb.com/types-of-business-ownership-2947962
