Define the Term Business Ownership: What You Need to Know
When you define the term business ownership, it's important to understand the different types of business and ownership structures.3 min read
2. Types of Business Ownership: Sole Proprietorship
3. Types of Business Ownership: Partnership
When you define the term business ownership, it's important to understand the different types of business and ownership structures. Business ownership refers to the control over an enterprise, providing the power to dictate the operations and functions.
Business Ownership: Overview
Businesses can be acquired in several ways:
- Starting a new business
- Franchising an existing business
- Buying an existing business
If you choose to start your own business, this is one of the ways to become a company owner. This process comes with several key benefits. The first benefit is retaining complete control over the company. You don't have to answer to anyone, nor are you contractually bound to follow someone else's rules. Business owners can also introduce new services and products, plans for expanding the business, and other aspects of growth and success.
If you choose to franchise an existing business model, that is a way to become a business owner as well. This business model combines owning part of an existing business with starting a new company. When you franchise a business, you obtain the rights to advertise and market another company's products. That company is usually well-established in the industry and doing well.
One of the key advantages to franchising is reduced risk. Starting a new business is risky, but franchising allows you to build on the success of an existing company. A franchise owner also doesn't have to devote as much time to establish the new business.
Buying a company that is already operating is the third way to become a business owner. Advantages of this option include less time required to get started with the operations of the business, along with lower expenses than what you would have to spend on establishing a new business. You'll also have an established group of suppliers and an established client base.
Types of Business Ownership: Sole Proprietorship
When a business is owned and operated by a single person, it is a sole proprietorship. This business formation is the most common among business owners in the United States. Most small companies start as sole proprietorships. This type of company is owned by a single person, who is typically responsible for the day-to-day operations of the business.
A sole proprietorship does not exist as a legal entity, separate from its owner. This means that the business owner is personally responsible for all obligations and debts. The owner also keeps all business profits. A sole proprietor owns the business assets and all of its profits. This individual is also completely responsible for any business debts and liabilities.
Several of the advantages of forming a sole proprietorship include:
- Ease of formation
- Low cost of formation
- Ownership of all business profits
- Control and flexibility, with few government regulations on how the business must be run
- Ease of dissolving the business
- The option to keep some things about the business private
Sole proprietorships do come with some disadvantages as well. These include:
- Limited financing sources, based on the owner's personal credit
- All debt is taken on as personal debt, which could impact your personal assets
- Limited lifespan since the business ends upon the death of the owner
- The need to know how to do it all, such as marketing, management, accounting, etc.
When a new business owner doesn't have a lot of resources or capital, they might form a sole proprietorship in the early stage.
Some of the required federal tax forms for sole proprietorships include:
- Employment Tax Forms
- Form 4562: Depreciation and Amortization
- Form 1040: Individual Income Tax Return
- Form 1040-ES: Estimated Tax for Individuals
- Schedule SE: Self-Employment Tax
- Schedule C: Profit or Loss from Business (or Schedule C-EZ)
- Form 8829: Expenses for Business Use of your Home
Types of Business Ownership: Partnership
Another option for business formation is a partnership, which is owned by at least two people. In the United States, the partnership is used least commonly by business owners. The two main types of partnerships are limited and general. A limited partnership has at least one partner whose liability is limited to the amount invested in the company. In general partnerships, each partner is liable for any business debts and obligations on a personal level.
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