When starting a new business, the first step is deciding how to organize your business structure. There are six common types of business ownership, each with its own set of benefits and drawbacks:
Non Profit Corporation
In this article, we do a rundown of everything you need to know about each of the common types of business ownerships for small business owners. Let's look at it.
Six common types of business ownerships
Let's look at the different types of business ownership, along with some advantages and disadvantages, to help you figure out which one best fits your ideal business structure.
1. Sole proprietorship
In a sole proprietorship, the business owner has complete accountability for their business. Because in legal terms, you and your business are one entity. Entrepreneurs typically choose sole proprietorship due to the low initial costs when venturing into entrepreneurship. But as their business grows and evolves, they eventually move on to a more solid type of business entity that protects their assets. Below are some sole proprietorship advantages and disadvantages.
Advantages of a sole proprietorship
A sole proprietorship is a type of business ownership with advantages including the following:
Minimal initial paperwork required.
Less expensive type of business entity in terms of taxation and setup costs.
As a business owner of a sole proprietorship, you'll be fully entitled to all your business's profits.
More minor legal implications compared to other types of business entities.
Sole proprietorship disadvantages
Compared to other types of ownership, sole proprietorship has the following disadvantages:
You are 100% liable for all your business debt, liabilities, and legal issues.
If someone files a lawsuit against your business, it will be filed against your name.
You also put your assets at risk by not separating you and your business as separate entities.
A high-risk option for companies that want to grow and expand.
A partnership could be a good option if you are starting a business and want to share the risks and benefits. Unfortunately, many attribute the term partnership to big legal firms that decide to work together. But this type of ownership is accessible to two or more people working on one business idea. Small business owners usually opt for partnerships to start a family business with relatives or their couple.
You can use a 50%-50% model in dividing ownership, but both parties can freely decide how to split up liabilities. To avoid any misunderstanding and dispute, we recommend that you establish and consent to the terms and conditions in a written agreement, especially if there's family involved! Below we'll cover some advantages and disadvantages of a partnership.
Advantages of a partnership
In summary, some of the partnership advantages are the following:
You can merge different partners' experience, talent, and power into one business.
Easy to establish.
Partnerships may be subject to fewer legal regulations than corporations.
Business taxes are filed by filling out a partnership income tax return.
Disadvantages of a partnership
Below are some disadvantages of partnerships:
General partners are individually and personally accountable for the business.
In a partnership, the partner's assets are at risk.
Disputes or conflicts could lead to dissolving the partnership or partner withdrawal.
3. Limited Liability Corporation (LLC)
In an LLC, the partners are referred to as "members." This type of business ownership can give you both the benefits of corporations and partnerships. Why? Because each member's assets are protected, in most cases, against business bankruptcy or lawsuits. Additionally, all business profits and losses are also filed as corporate taxes.
However, LLC members are considered self-employed and required to pay the self-employment tax for Medicare and Social Security.
If your business is composed of a few members who want to protect their assets and have a high risk of litigation, this could be the right choice for you.
LLCs provide their owners with many advantages. Some of them include the following:
A good option for larger businesses that don't want to deal with the legal complexities and tax rates associated with operating a corporation.
Solid protection if you have a high-risk business.
This entity protects members' personal assets.
Most likely to pay fewer taxes than with a corporation.
Some limitations of LLC include:
Each state separately regulates LLC. For example, some states require LLCs to be dissolved and reformed if members leave the group unless a legal agreement details how to handle buying, selling, and transferring ownership.
Administrative costs mean more legal and tax regulations than sole proprietorships and partnerships.
In a corporation, multiple shareholders hold business stocks. It is a legal entity that is separate from its owners. Even if corporations are more costly to establish than partnerships or sole proprietorships, it is the safest option for owners that want to stir away from personal liability. Corporations also require significantly more extensive record-keeping, operational processes, and reporting than other business structures. Some types of corporations include:
If you opt for this type of business ownership, you and your business will be taxed separately. Whatever profits you receive as a business owner will be taxed as part of your income.
They offer the most substantial protection against personal liability, but it's typically more costly to establish than other business structures.
The name means "small business corporation." This type of business ownership allows profits, and some losses, to go directly to the owner's personal income without becoming subject to corporate tax rates.
Also, some advantages and disadvantages of a corporation include the following:
Advantages of a corporation
Some of the advantages include the following:
Limited liability, you will only be accountable for your own stock in the corporation.
This business entity also protects your personal assets.
A solid and dependable structure that doesn't just rely on a sole proprietor or partner.
An organized business entity where you are obliged to keep track of transactions.
Disadvantages of a corporation
Some of the disadvantages include the following:
More regulated and monitored by the government than a sole-proprietorship or partnership.
Higher organizational and operational costs.
Double taxation on the business income and shareholders also pay taxes on dividends received.
5. Nonprofit Corporation
This type of business ownership is only suitable if your business' purpose is performing charitable, educational, religious, literary, or scientific work for the benefit of the public. You can use any profits this entity makes to pay for its expenses, programs, charitable giving, and other associated purposes.
Because you as an owner don't generate any profits, if you qualify, you are tax-exempt. As a nonprofit, your company follows organizational rules similar to those of a standard C corp, along with special rules governing profits.
A cooperative is a business owned and operated for the benefit of the organization's members. So, whatever profits a cooperative earns should be shared among its members, which also means that all members partake in business operations equally. A cooperative must have bylaws, formal membership applications, a board of directors, and regular member meetings.
What is the best type of business ownership for your business?
After carefully reading our business ownerships guide and talking to your legal advisor and accountant, you can move on to the next vital step. It's time to access working capital for your business!
Owners of smaller businesses often struggle to access working capital from bank loans. Suppose you're figuring out how to get your business off the ground and have less than three months in business. You may not have the time, know-how, patience, or credit history to qualify for the same financing options designed to meet significant business needs.
One Park Financial believes that small and mid-size businesses should have easy access to working capital. As a result, we connect you with funders who specialize in working with small and mid-sized enterprises and are willing to work with people who don't have perfect credit. So please fill out our online application and Get Pre-Qualified Today! It only takes minutes.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.