Business Plan Tutorial: Types of Business Ownership

Types of Business Ownership

There are basically three types or forms of business ownership structures for new small businesses:

  1. Sole Proprietorship: A business owned and operated by a single individual — and the most common form of business structure in the U.S. The advantages with a sole proprietorship include ease and cost of formation — simply announcing you are in business and requesting any licenses and permits you may need; use of profits — since all profits from the business belong exclusively to you, the owner; flexibility and control — you make all the decisions and direct the entire business operations; very little government regulations; secrecy; and ease of ending the business. There are disadvantages, however, including unlimited liability — all business debts are personal debts, meaning you could lose everything you own if the business fails or loses a major lawsuit; limited sources of financing — based on your creditworthiness; limited skills — the sole proprietor really must be a “jack-of-all-trades,” part manager, marketer, accountant, etc.; and limited lifespan — the business ends when the owner dies.
  2. Partnership: A business that is owned and operated by two or more people — and the least used form of business organization in the U.S. There are two basics forms of partnerships, general and limited. In a general partnership, all partners have unlimited liability, while in a limited partnership, at least one partner has liability limited only to his or her investment while at least one other partner has full liability. Most states require a legal document called the “Articles of Partnership” that delineates details about each partner’s investment and role in the new company. The advantages of a partnership include ease of organization — simply creating the articles of partnership; combined knowledge and skills — using the strengths of each partner for better business decision-making; greater availability of financing; and very little government regulations. There are disadvantages, however, including unlimited liability — all business debts are personal debts; reconciling partner disagreements and action — each partner is responsible for the actions of all the others; sharing of profits — all money earned has to be shared and distributed to the partners per the articles of partnership; and limited lifespan — the partnership ends when a partner dies or withdraws.
  3. Private Corporation: A business that is a legal entity created by the state whose assets and liabilities are separate from its owners. While there are also public corporations — who stock (and ownership) are traded on a public stock exchange — most small businesses are (or at least start as) private corporations. A private corporation is owned by a small group of people who are typically involved in managing the business. Forming a corporation requires developing a legal document called the “Articles of Incorporation” and submitting them to the state in which the corporation wishes to reside. Advantages of a corporation include limited liability — an owner (stockholder) can only lose up to the amount s/he invested; unlimited lifespan — a corporation is charted to last forever unless its articles of incorporation state otherwise; great sources of funding; and ease of transfer of ownership. Disadvantages include double taxation — the corporation, as a legal entity, must pay taxes, and then shareholders also pay taxes on any dividends received.

Two other types of ownership of interest to entrepreneurs include:

  • S Corporation: A form of ownership that is the best of both partnerships and corporations. Owners have limited liability, greater credibility (for obtaining financing), and no double taxation as all profits pass directly to the owners and the corporation pays no taxes. There are, however, restrictions on the number and type of shareholders.
  • Limited Liability Company (LLC): A form of ownership growing in popularity in the U.S. that provides limited liability and is taxed as a partnership or sole proprietorship (depending on the number of members). This type of business formation — formed by submitting articles of organization to the state in which the company resides — is growing rapidly because it is flexible, simple to run, and does not require all the paperwork of corporations.

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