Advantages and Disadvantages of Business Ownership
What are the advantages and disadvantages of business ownership? The pros and cons may vary based on the business type as well as individual circumstances.4 min read
What are the advantages and disadvantages of business ownership? The pros and cons may vary based on the business type as well as individual circumstances.
Small Business Ownership
Being a business owner can be very rewarding and offers several advantages:
- As a small business owner, you are your own boss and cannot be fired and therefore have more freedom to make important decisions.
- You may have flexibility to work when and where you want. If you have a family emergency, you don't need to ask your boss's permission to take time off, or you may decide to run your business from home to eliminate a commute.
- Despite the risks involved, owning a business may provide greater financial rewards.
- There are more learning opportunities since you're involved with all aspects of your company.
- You will often have greater personal satisfaction and more creative freedom.
However, there are some disadvantages:
- You are responsible for the expensive startup costs and financial risks of starting a business.
- You are more likely to be stressed running your own business versus working for someone else.
- While there is a chance you will have more flexibility once the business is established, the time commitment when opening a business is more significant than working as an employee elsewhere.
- Some duties may be less than desirable when you are the business owner, like having to fire an employee.
Advantages to Sole Proprietorship
A sole proprietorship is the most common business organization for a small business owner for several reasons:
- It is the easiest business type to set up because there is no paperwork to file.
- Owners have total control of their own business and make their own decisions.
- Filing taxes is simple.
- The profits are only taxed once a year on the owner's personal tax returns.
- If the owner dies, it's easy to liquidate the business's assets.
However, this type of entity also has some disadvantages:
- Owners are personally liable for the business. This means you could lose your personal assets, like your home, if you lose a judgment.
- There is no opportunity to bring in outside capital from investors.
- If the owner passes away, the business will be liquidated.
- You may find it more difficult to borrow money from banks.
Partnerships Pros and Cons
If you have more than one owner, a partnership may be the right business structure for you. As with sole proprietorships, there are pros and cons.
- Partnerships are easy to form.
- They allow a group of people with different talents to come together and run a business.
- If allowed, the partnership could continue after an owner's death.
Potential disadvantages are:
- Unlimited liability for owners.
- Management conflicts, which can occur if owners cannot agree on major decisions.
- Profit sharing between owners, but there may be dissension if people do not feel adequately compensated.
Limited Liability Companies
There are several advantages to structuring your business as an LLC.
- There is limited liability for the owners, which means personal assets are protected from the company's defaults and judgments.
- A majority of states do not require LLCs to hold annual meetings.
- There is no limit to how many shareholders you can have.
- LLCs are not required to appoint a board of directors.
However, there are some disadvantages.
- You must file articles of incorporation in your state of domicile.
- You are going to have higher accounting and legal costs when compared to sole proprietorships and partnerships.
- Owners may be required to create an operating agreement which governs business operations and management authority.
- In some instances, the LLC could be dissolved if a member dies, unless it is otherwise specified in the operating agreement.
Corporation Pros and Cons
Traditional corporations are considered separate legal entities from their shareholders. It can buy property, sell assets, enter into contracts, and even sue other parties. Some other advantages include:
- Shareholders don't have personal liability for corporate debts and liabilities. They are liable only up to their investment amounts.
- There is more access to financial resources since a corporation can raise capital by selling stock or obtaining bank loans.
- Corporations tend to attract a better and more experienced pool of candidates for hire.
- The corporation will continue to exist even if a shareholder passes away.
Potential disadvantages include:
- Double taxation.
- A traditional corporation is the most complex type and usually requires a lawyer's assistance to get set up.
S corporations are different from C corporations and combine LLC tax benefits and corporation liability protection. You can avoid double taxation, but there are very strict requirements to qualify.
If you need help understanding the advantages and disadvantages of opening a business, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.