7 Examples of Business Structures and How to Choose the Best One for Your Company
Choosing the right business structure is one of the most important decisions you will make as an entrepreneur. The business structure you choose will affect how you pay taxes, how you raise funds, how you protect your assets, and how you manage your operations. There are different types of business structures, each with its own advantages and disadvantages. In this article, we will explain what are the main examples of business structures and how to choose the best one for your company.
Sole Proprietorship
A sole proprietorship is the simplest and most common type of business structure. It is a business owned and operated by one person, who is responsible for all aspects of the business. A sole proprietorship does not require any formal registration or paperwork, and the owner can use his or her own name or a trade name for the business. The owner has full control over the business and can make all decisions without consulting anyone else.
However, a sole proprietorship also has some drawbacks. The owner is personally liable for all debts and obligations of the business, which means that his or her personal assets, such as bank accounts, car, or house, can be seized by creditors or sued by customers. The owner also has to pay self-employment taxes on the entire income of the business, which can be higher than corporate taxes. Additionally, a sole proprietorship has limited growth potential, as it is difficult to raise capital from investors or lenders.
Partnership
A partnership is a business structure where two or more people agree to share the ownership and management of a business. There are two main types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have equal rights and responsibilities in running the business and are personally liable for its debts and obligations. In a limited partnership, there are two types of partners: general partners and limited partners. General partners have the same rights and responsibilities as in a general partnership, but limited partners only contribute money or assets to the business and have no say in its management. Limited partners also have limited liability, which means that they are only liable for the amount they invested in the business.
The main advantage of a partnership is that it allows for more flexibility and creativity in running the business, as partners can pool their skills, resources, and ideas. A partnership also has lower start-up costs and less paperwork than a corporation. Moreover, a partnership can benefit from tax advantages, as it is not taxed as a separate entity but passes its income and losses to its partners, who report them on their personal tax returns.
However, a partnership also has some disadvantages. Partners are jointly and severally liable for the debts and obligations of the business, which means that each partner can be held responsible for the entire amount owed by the business. Partners also have to share profits and losses equally, unless they have a written agreement that specifies otherwise. Additionally, a partnership can be unstable, as it can be dissolved by the death, withdrawal, or bankruptcy of any partner.
Corporation
A corporation is a business structure that creates a separate legal entity from its owners. A corporation is owned by shareholders, who elect a board of directors to oversee the management of the business. A corporation can have one or more shareholders, who can be individuals or other entities. A corporation can also issue different types of shares, such as common shares or preferred shares, which give different rights and benefits to shareholders.
The main advantage of a corporation is that it provides limited liability to its shareholders, who are only liable for the amount they invested in the business. A corporation also has more credibility and legitimacy than other types of business structures, as it has to comply with various laws and regulations. Moreover, a corporation has unlimited life span and can continue to exist even if its shareholders change or die. Furthermore, a corporation has easier access to capital from investors or lenders, as it can issue shares or bonds to raise funds.
However, a corporation also has some disadvantages. A corporation is more complex and expensive to set up and maintain than other types of business structures, as it requires registration fees, annual reports,
legal documents, and accounting records. A corporation also faces double taxation, as it has to pay corporate taxes on its income and then shareholders have to pay personal taxes on their dividends. Additionally, a corporation has less flexibility and control than other types of business structures, as it has to follow strict rules and procedures set by the government and its shareholders.
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid type of business structure that combines some features of a corporation and some features of a partnership. An LLC is owned by members, who can be individuals or other entities. An LLC can have one or more members, who can manage the business themselves or appoint managers to do so.
The main advantage of an LLC is that it provides limited liability to its members, who are only liable for the amount they invested in the business. An LLC also has more flexibility and simplicity than a corporation, as it does not have to follow the same rules and regulations as a corporation. Moreover, an LLC can benefit from tax advantages, as it can choose to be taxed as a sole proprietorship, a partnership, or a corporation, depending on its needs and preferences.
However, an LLC also has some disadvantages. An LLC has higher start-up costs and more paperwork than a sole proprietorship or a partnership, as it requires registration fees, operating agreements, and annual reports. An LLC also has limited life span and can be dissolved by the death, withdrawal, or bankruptcy of any member. Furthermore, an LLC has less credibility and legitimacy than a corporation, as it is not subject to the same level of scrutiny and accountability as a corporation.
Cooperative
A cooperative is a business structure where a group of people or entities work together to achieve a common goal. A cooperative is owned and controlled by its members, who can be customers, workers, suppliers, or producers. A cooperative can operate in various sectors, such as agriculture, retail, banking, or housing. A cooperative can have different legal forms, such as a corporation, an LLC, or a partnership.
The main advantage of a cooperative is that it promotes democracy and equality among its members, who have equal voting rights and share profits and losses based on their participation or contribution. A cooperative also fosters social responsibility and community involvement, as it aims to serve the needs and interests of its members and the society at large. Moreover, a cooperative can benefit from tax advantages, as it is not taxed on its income but only on its dividends.
However, a cooperative also has some disadvantages. A cooperative is more difficult and time-consuming to set up and run than other types of business structures, as it requires consensus and cooperation among its members. A cooperative also faces challenges in raising capital from investors or lenders, as it does not issue shares or bonds to raise funds. Additionally, a cooperative has less efficiency and innovation than other types of business structures, as it may have conflicts or disagreements among its members or lack of incentives for individual performance.
Franchise
A franchise is a business structure where one party (the franchisor) grants another party (the franchisee) the right to use its name, logo, products, services, and business model in exchange for a fee and a percentage of sales. A franchise can be either product-based or service-based. A product-based franchise sells the franchisor’s products under its brand name, such as McDonald’s or Coca-Cola. A service-based franchise provides the franchisor’s services under its brand name, such as H&R Block or Marriott.
The main advantage of a franchise is that it provides a proven and successful business model to the franchisee, who can benefit from the franchisor’s reputation, experience,
training, marketing, and support. A franchise also reduces the risk and uncertainty for the franchisee, who can rely on the franchisor’s guidance and expertise. Moreover, a franchise has easier access to capital from investors or lenders, as it has an established brand name and customer base.
However, a franchise also has some disadvantages. A franchise is more costly and restrictive than other types of business structures, as it requires initial fees, ongoing royalties,
advertising fees, and compliance with the franchisor’s rules and standards. A franchise also limits the creativity and autonomy of the franchisee, who has to follow the franchisor’s policies and procedures without much room for innovation or customization. Additionally, a franchise depends on the performance and reputation of the franchisor, who may have quality issues or legal problems that affect the franchisee.
How to Choose the Best Business Structure for Your Company
There is no one-size-fits-all answer to choosing the best business structure for your company. The best business structure for your company depends on various factors,
such as:
- The nature and size of your business
- The number and type of owners
- The level of liability protection you need
- The amount of capital you need
- The tax implications you prefer
- The degree of flexibility and control you want
To choose the best business structure for your company,
you should:
- Research the pros and cons of each type of business structure
- Consult with a lawyer and an accountant to get professional advice
- Compare your options based on your goals and needs
- Register your business with the appropriate authorities
- Review your choice periodically and make changes if necessary
Business Structures and Global Demand
Sole Proprietorship
A sole proprietorship is a type of business structure where one person owns and operates the entire business. It is the simplest and most common form of business structure, especially for small businesses and freelancers. Some advantages of a sole proprietorship are:
- Easy and inexpensive to set up and run
- Complete control over the business decisions and operations
- No separate taxation for the business income
However, a sole proprietorship also has some disadvantages, such as:
- Unlimited personal liability for the business debts and obligations
- Difficulty in raising capital and expanding the business
- Lack of continuity if the owner dies or retires
A sole proprietorship may face challenges in meeting the global demand for its products or services, as it may not have the resources, expertise, or network to compete with larger and more established businesses. A sole proprietorship may also have to comply with different legal and regulatory requirements in different countries, which can increase the complexity and cost of doing business internationally.
Partnership
A partnership is a type of business structure where two or more people share the ownership and management of a business. There are different types of partnerships, such as general partnerships, limited partnerships, and limited liability partnerships, depending on the level of involvement and liability of each partner. Some advantages of a partnership are:
- More capital and resources available for the business
- Shared skills, knowledge, and expertise among the partners
- Tax benefits as the business income is taxed only once at the individual level
However, a partnership also has some disadvantages, such as:
- Potential conflicts and disagreements among the partners
- Joint and several liability for the business debts and obligations
- Lack of continuity if a partner dies, withdraws, or joins the partnership
A partnership may have more opportunities to meet the global demand for its products or services, as it can leverage the strengths and connections of each partner. A partnership may also have more flexibility and adaptability to respond to changing market conditions and customer preferences. However, a partnership may also face challenges in maintaining a consistent brand identity and quality across different countries, as well as managing the legal and financial risks involved in international business.
References:
http://ctb.ku.edu/en/table-of-contents/structure/organizational-structure/overview/main
https://books.google.com/books?id=zFSgs52KSmoC&dq=Corporate%20structure&pg=PA167
http://www.bridgespan.org/getmedia/b1139597-adfe-4dd7-bbb2-ac8c67883020/Effective-Organizations_-Structural-Design.pdf.aspx
https://www.forbes.com/advisor/business/organizational-structure/
https://www.wallstreetmojo.com/business-structure/
https://www.indeed.com/career-advice/career-development/business-structures
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.investopedia.com/terms/b/business-structure.asp
https://www.thebalancesmb.com/types-of-business-structures-2951196
