What are the Types of Business Ownership : Explained with Advantages and Disadvantages

Starting a business is one of the most exciting and fulfilling experiences. However, from where do you begin? There are various strategies for starting a company, and numerous essential factors must be considered.

The decision to start a business is significant and filled with challenges. The first problem that business owners face is selecting an ownership structure, which will greatly affect the type of business ownership used.

Let’s understand the different types of businesses so you can select the right ownership structure for your upcoming business venture. We will guide you through three main types of business ownership, each with pros and cons contributing to the decision-making process.

Why to Learn About the Types of Business Ownership?

The terminology for businesses changes due to this variation and others. Understanding these different types of business ownership is important for several reasons:

• Understanding the legal and financial implications for different business ownerships helps the owners make informed decisions about the legal liabilities and tax implications.
• The liabilities help the owners assess and manage risks accordingly and effectively strategize operational needs and goals.
• A bigger business is more valuable in issuing stocks and raising funds for operations and expansion. On the other hand, a small business has limited options for receiving external funding, thus differing in terms of access to capital. 
• Finally, a clear understanding of the different types of business ownership and what entails them helps businesses make strategic decisions for their long-term and short-term business objectives. 

10 Types of Business Ownership 

There are a total of 10 types of business ownership. Let’s look at the 10 types: 

1. Sole-Proprietorship - a business that is owned and operated by an individual.
2. Partnership - two or more owners come together to become joint owners and control a business.
3. Private Corporation - different individuals come together to form a group and manage a business. 
4. Limited Liability Company - the owner’s assets are protected in case of bankruptcy. 
5. Cooperative - an enterprise privately owned by the individuals who benefit from it.
6. Non-Profit Corporation - a corporation that operates for the greater good of a community or provides social service to society.
7. Benefit Corporation - a type of corporation that aims to benefit the public while making a profit. 
8. Close Corporation - a business whose ownership is limited to individuals with close association with the business.
9. C-Corporation - privately owned business with an unlimited number of shareholders.
10. S-Corporation - common choice of ownership for small businesses with no more than 100 stakeholders. 

However, this guide will detail the three common types of business ownership: sole proprietorship, partnership, and corporation. 

1. Sole-Proprietorship

Also known as individual entrepreneurship, sole trader, or simply proprietorship, this type of business ownership involves a person owning and operating the business. It is the simplest form of business entity commonly found in small businesses and startups. 

Key Features of Sole Proprietorship 

Source: Business Jargons

• The owner has complete control over all aspects of the business, including decision-making, building strategies, creating objectives, and handling operations. 
• The owner is personally liable for all business debts and obligations, which means the owner is solely liable for any debts or legal liabilities. 
• Setting up a sole proprietorship is relatively easy as it involves minimal paperwork and legal formalities. 
• There is no need to share profits, as anything the business makes belongs exclusively to the owner. 
• Regarding tax benefits, sole proprietorships can report business profits and losses on their tax returns. The business itself is not taxed separately. You can check the Internal Revenue Service website to understand the kinds of liabilities and taxes needed to be filed for sole proprietorship. 
• This form of business may not be able to access capital funding from other organizations easily. 

Advantages of Sole Proprietorship 

Imagine running your own small business, where every decision is yours, and every success feels deeply personal. That's the beauty of a sole proprietorship—it's like being the captain of your ship. Let's explore the advantages of this business structure:

• Sole proprietorships do not have a pyramid of decision-makers. The owner can make and implement decisions quickly without going through a big team's arduous approval system. 
• One of the best advantages of this form of business is that of customer relationship. The owners can personally interact with their customers and gauge customer preference and satisfaction with their products and services. 
• Sole proprietors can easily adapt their business models, products, or services and establish unique identities. This adaptability feature can help them gain a competitive advantage in a dynamic business landscape. 
• There is greater privacy regarding financial and operational matters because the owner controls all business aspects. They do not need to disclose sensitive information or profit margins to external stakeholders because they don't exist!
• If the owner decides to sell the business, it is easier than any other form of business. 

Disadvantages of Sole-Proprietorship

You're the boss, but sometimes, being the sole business owner means carrying all the weight on your shoulders. From unlimited liability to struggling to raise funds, there are a few bumps in the road, such as:

• Sole-proprietorship owners build their businesses by putting at stake their assets, such as savings, property, and investments. They are personally liable for any debts and obligations, which could make this form of business a high-risk investment. 
• This factor and the outlook of sole proprietorships make it challenging for the owners to secure financing and investment capital. The business could discontinue when resources are depleted for personal or impersonal reasons. 
• They work in small teams, so they may lack access to specialized skills, expertise, and resources that any large company can afford. 

2. Partnership

Partnership businesses operate on the merit of legal partnership. A partnership business is formed when two or more individuals collaborate to operate and manage the business, outlining each partner’s rights, responsibilities, and profit-sharing arrangements. 

The forms of partnership in this business vary. In some cases, all the partners are equally liable for debts and hold equal rights on profit. It is termed a general partnership. In another case, some of the partners have limited liability. This is termed a Limited Liability Partnership (LLP). 

Key Features of Partnership

Source: Business Jargons

• Partners individually combine their resources, skills, and expertise to achieve a common business objective. 
• Decision-making is shared among partners.
• Any form of debt and liabilities are shared between partners. 
• There is a shared goal among partners, and both strive to achieve it.

Advantages of Partnership Business

Partnership businesses offer a unique blend of shared responsibility and collaborative decision-making, fostering a sense of mutual trust and support among partners. This structure allows for a more personalized approach to entrepreneurship, where individuals can leverage diverse skills and resources to achieve common goals.

• Each partner brings unique strengths and perspectives, leading to better decision-making and problem-solving collectively or focusing on their particular niche heading for a common goal. Through contributions from multiple partners, they can access a wider network of contacts, suppliers, and investors. 
• The partners distribute the financial burdens and can make better decisions about investment in growth opportunities.
• Depending on the jurisdiction and partnership agreement, partnerships may offer tax advantages such as pass-through taxation for businesses that do not pay taxes on the entity level. Instead, the income passes to the business owners, who pay personal income taxes for their share of the business. Business profits and losses are reported on individual partners’ tax returns, potentially resulting in lower overall tax liabilities.
• These businesses can withstand dire situations in the dynamic landscape, adding longevity and stability benefits.
• There is no need to go through the legal formalities to initiate a business partnership. It is solely a personal choice of whoever wants to partner with and set up a business. 

Disadvantages of Partnership Business

Partnership businesses offer close collaboration between individuals, yet they come with their fair share of challenges. From shared liabilities to potential conflicts, partnerships require a delicate balance. Let's explore the drawbacks of partnership business.

• While shared decision-making may result in better results, in some cases, it can also lead to conflict between the partners, often stemming from different management styles, perspectives, and priorities. 
• Partnership business involves sharing profits, which may compromise individual autonomy and financial returns compared to sole proprietorship. 
• If any business partners decide to withdraw, it might not be the easiest thing to do. In such a case, disputes concerning shares and asset distribution might arise. 
• Imbalances in workload, investment, or decision-making authority can lead to partner dissatisfaction and affect the company’s functioning. 

3. Corporation

Corporations are not owned by individuals per se but are legally treated as individuals. This business is run and governed by a board of directors who are not personally liable for any of the company’s debts. This aspect of the business is termed incorporation. 

Key Features of Corporation 

• There are no personal liability issues.
• Such businesses' lifespans are longer, allowing them to continue operations regardless of any company mishaps.
• Such businesses can easily raise capital funds for operation, management, and expansion. 
• Building a corporate business requires systematic planning, including legal formalities, financial planning, and adherence to regulatory requirements.

Advantages of Corporation Business 

Corporate businesses have a bigger opportunity in scalability. This is because they have several advantages, like access to greater funding, talent, and better decision-making processes. These features of a corporation enhance its credibility and add to its longevity in competitive markets. Let us look at the advantages of corporation business in detail:

• Limited liability keeps the board members' assets hidden and protects them from financial losses beyond the investments they have made within the corporation. 
• Such businesses have higher credibility and, hence, a better chance of raising capital, whether human, labor, or financial capital (debt and equity). These capitals help them in expansion, research and development, and other development strategies to scale a corporate business. 
• Shares of stock in corporations are generally transferable, allowing shareholders to buy, sell, or transfer their ownership interests without disrupting the company's operations. 
• Corporate businesses have the resources to access a bigger talent pool and professional management. This helps them create a tailor-made identity to climb the business ladder in a competitive field. 

Disadvantages of Corporation Business

Running a corporation comes with its fair share of challenges. From bureaucratic hurdles to impersonal decision-making, the disadvantages of this business structure can often outweigh its benefits. Let's look at some of the disadvantages of corporation-type business ownership.

• Corporations must go through endless paperwork to make their products and services operational.
• Corporate-level businesses have to bear double taxation, one that of profit taxes and then of shareholders who are taxed on dividends or capital gains they receive from the corporations. 
• Maintaining corporate businesses can be expensive due to their huge product and service generation capacities. 
• The board members finalize decisions regarding any matter, and since there are many of them, the companies have to follow stringent protocols to avoid conflicts. 

Comparing the Three Types of Partnerships

Summing up

In the journey of business ownership, whether you're starting alone, navigating partnerships, or steering a corporate partnership, each course comes with its own set of winds and waves. Sole proprietorships offer unparalleled autonomy but carry the weight of unlimited liability. Partnerships foster collaboration but demand a delicate balance of shared responsibilities. Corporations promise scalability but face bureaucratic tides and double taxation.

Ultimately, your chosen path must align with your goals, values, and willingness to weather the challenges ahead. Whether you're your boss or navigating the map with others, remember every decision shapes the course of your journey. 

Frequently Asked Questions

1. What are the main types of business ownership, and why is it important to understand them?

Understanding the different types of business ownership - sole proprietorship, partnership, and corporation - is crucial because it directly impacts legal liabilities, tax implications, access to capital, decision-making processes, and long-term business objectives. Knowing these distinctions helps business owners make informed decisions that align with their goals and circumstances.

2. What are the advantages of a sole proprietorship? 

A sole proprietorship offers complete control, quick decision-making, direct customer interaction, adaptability, privacy, and ease of dissolution. It might be ideal for entrepreneurs seeking autonomy and simplicity, where personal assets can be leveraged for business, and quick decision-making is valued.

3. What distinguishes a partnership from other types of business ownership?

Partnerships involve collaboration between individuals, resource sharing, decision-making, and profits. Advantages include diversified skills, access to a wider network, shared financial burdens, and tax benefits. However, many challenges are associated with partnership business, such as conflicts in decision-making, profit-sharing, and potential disputes upon partner withdrawal.

4. What are the key features and advantages of a corporation?

Corporations are legally distinct entities with limited liability, longevity, access to capital, and scalability. Advantages include protection of personal assets, credibility for raising capital, transferability of ownership, and access to professional management. 

5. How can I decide which type of business ownership is right for me?

Choosing the right type of business ownership depends on various factors such as personal preferences, risk tolerance, financial resources, long-term goals, and the nature of the business. Consider factors like control, liability, access to capital, scalability, tax implications, and operational requirements. Consult legal and financial advisors, as they can provide valuable insights tailored to your specific circumstances and objectives.

6. What are some factors to consider when selecting a type of business ownership?

1. Liability Protection: Different business structures offer varying levels of personal liability protection. Sole proprietorships and partnerships typically offer less protection, meaning personal assets could be at risk if the business incurs debt or legal issues. In contrast, corporations and limited liability companies (LLCs) provide more extensive protection, keeping personal assets separate from business liabilities.
2. Tax Implications: Each business structure has unique tax obligations and benefits. For instance, sole proprietorships, partnerships, and LLCs can often benefit from "pass-through" taxation, where business income is taxed on the owner's personal tax return, potentially avoiding double taxation. Corporations are taxed separately from the owners, which could lead to double taxation (on the corporate income and the dividends paid to shareholders) but may offer other tax advantages.
3. Control and Decision-making: Consider how much control you want over the business and its decisions. Sole proprietorships offer complete control to the owner, while partnerships require agreement among partners. In a corporation, decision-making is typically divided among shareholders, a board of directors, and officers, potentially diluting individual control but benefiting from diverse input.
4. Flexibility and Future Needs: Some business structures are more flexible than others. LLCs, for example, offer flexibility in management and profit distribution. It’s crucial to consider not only your current needs but also how your business might evolve. Changing your business structure down the line can be complex and costly, so try to anticipate future changes in size, ownership, or type of business activity.
5. Funding and Investment Needs: If you plan to seek external funding or investment, certain structures may be more appealing to investors. Corporations, especially C corporations, are typically more attractive to venture capitalists and allowing for easier issuance of stock. In contrast, sole proprietorships and partnerships may face challenges in raising funds.
6. Administrative Complexity and Cost: Some structures are simpler and cheaper to start and maintain than others. Sole proprietorships and partnerships usually have fewer regulatory requirements and lower startup costs, whereas corporations and LLCs involve more paperwork, regulatory compliance, and potentially higher ongoing costs.
7. Industry and Business Model: Your choice might also be influenced by industry norms and the specific needs of your business model. Some industries have common practices or legal requirements that favor one structure over others.
8. Exit Strategy: Consider how easy it will be to sell the business, bring in new partners, or dissolve the business under each structure. Some structures offer more flexibility for exiting or transferring ownership than others.

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