Individual Ownership of Business
Individual ownership of business means that a business is owned and operated by a single person.3 min read
Individual ownership of business means that a business is owned and operated by a single person. Single-owner LLC businesses are also included in this category. In contrast, a business owned by several individuals is a multiple-owner businesses. Partnerships and LLCs are typically multiple-owner businesses. The owners are not employees.
Types of Business Ownership
There are numerous ways to organize a business. The four most common types, from the most basic to the most complex, are:
- Sole Proprietorship
Sole proprietorship means individual ownership. It's the simplest way to organize a business, as one sole owner is responsible for running the business. As a legal entity, it does not separate the business from the owner, which means the owner is liable for any business obligations, including debts, on a personal level. Sole proprietorships are recognized as business entities in every state. In some states, this type of ownership does not require the owner to register with the state, as the entity forms automatically once an individual conducts any business. The business is associated with the owner's name, unless they file for a fictitious business name.
In a partnership, two or more people act as business co-owners. A partnership can be either a general partnership or a limited partnership, which generally depends on the owners' liability coverage. Similar to a sole proprietorship, owners in a general partnership have unlimited liability. On the other hand, at least one owner in a limited partnership has a limited liability, which means they are not personally responsible for any business debts.
Both types of partnership are relatively simple and inexpensive to create. They are subject to fewer government regulations, and are taxed only once.
In contrast to sole proprietorship and partnership, a corporation is a type of ownership regarded as a separate legal entity from its owners. This creates the desired limited liability for all owners, but requires double taxation on profits (first as corporate income tax, then as a personal income tax once owners receive their profits). To form a corporation, the state requires that "Articles of Incorporation," a specific type of legal document, be filed with the state.
In general, corporations find it easier to raise capital than sole proprietorships or partnerships, as they have more options when it comes to funding (e.g. selling stock). However, there are greater government regulations when it comes to corporations, and as such businesses may be required to keep more extensive records.
- Limited Liability Company
An LLC (limited liability company) is a combination of legal structure that offers both the limited liability components of a corporation and the operational flexibility and tax efficiencies of a partnership.
Pros and Cons of Sole Proprietorship
There are numerous advantages to sole proprietorship. It's simple and does not require expensive fees to create. It also has fewer government regulations than other types of ownership, which makes it more flexible, as the owner has complete control over its operation. Profits from a sole proprietorship business are taxed just once, and tax breaks may be available if the business is struggling. In addition, the business owner does not need to share any profits with other owners.
Thanks to the advantages of sole proprietorships, they are often the most appropriate type of ownership during the initial stages of a business when the owner has limited resources and capital to work with but has fewer debts as well.
However, unlimited liability can be risky to an individual business owner, as all business debts become personal debts. This means that as an individual owner, if your business fails or loses a major lawsuit, you could lose everything. In addition, you may have limited financial sources (based on your credit history) and limited skills. If you're the sole owner, you'll need to manage and market your business, and handle accounting.
Pros and Cons of Partnership
The most significant benefit of a partnership is that additional owners bring additional knowledge and resources. However, the unlimited liability is still a risk factor, as all business debts become personal debts. In addition, each partner is responsible for the actions of other partners. Partner disagreements may arise, and all profits must be shared among partners in a way detailed in the articles of partnership. The partnership ends when a partner withdraws or dies.
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