Forms of Business Ownership

There are primarily four forms of business ownership to choose from regarding your company's legal structure. They include:

  • Sole proprietorship
  • Partnership
  • Corporation
  • Limited liability company (LLC) or a cooperative

All these structures have advantages and disadvantages you must consider before choosing one for your business.

The Sole Proprietorship Form of Business Ownership

A sole proprietorship is the simplest business structure, owned and operated by a single person. A sole proprietorship can operate under your name or an assumed name. You can't add legal designations of other business structures, like Inc. or Corp., to the name.

The main benefit of a sole proprietorship is how easy and affordable it is to create. In many cases, a sole proprietorship does not require formal registration. In places where you do need to register a sole proprietorship, it is far less expensive than registering other forms of businesses, such as corporations.

Additionally, you don't have to file annual reports or pay taxes on business profits. As a sole proprietor, you file the business income tax with your personal income tax returns, because you and the sole proprietorship are the same. The biggest advantage of owning a sole proprietorship is that it gives you total control and ownership of your business.

However, a sole proprietorship is an extension of its owner under the law, implying that you are fully responsible for the company's debts and liabilities. If your sole proprietorship fails, creditors can come after your personal assets to settle the business debts and obligations. A sole proprietor's personal liability to the business is one of the biggest downsides of operating this form of business. Additionally, a sole proprietorship does not enjoy a flexible tax regime, cannot raise money easily, and might suffer from poor management if the owner lacks sound business knowledge.

The Partnership Form of Business

A partnership is the entity created when two or more people decide to co-own a business. If you don't want to bear the burden of running a business alone, a partnership is an ideal business structure. There is no limit to the number of people that can set up a partnership, but there must be at least two partners. Before creating a partnership, it is important to draft a well-thought-out operating agreement that will cover the following:

  • Name of the partners and the process of adding new partners or removing them.
  • Outline of the company.
  • Each partner's percentage of investment and profit.
  • How the partnership will be dissolved.

Types of Partnership

Partnerships can be in the form of:

  • General partnerships, the most common form.
  • Limited partnerships.
  • Limited liability partnerships.
  • Limited liability companies.

A limited partnership is a business structure in which partners invest in the partnership without having managerial powers in the business. The liability of partners in a limited partnership is proportional to the percentage of their investment in the company. As a limited partner, you cannot participate in the management of the company. Only general partners can hold managerial roles.

The formation of a limited liability partnership is restricted to groups of professionals such as accountants, doctors, lawyers, and architects. A partnership can enter into contracts and take bank loans as a legal entity, making it easier for the business to raise capital. Like a sole proprietorship, a partnership is a pass-through entity. In other words, the company's profits and losses pass directly to the partners who report it on their income tax returns.

Disadvantages of Partnerships

The main drawback of partnerships is they do not protect the partners from liability for the business's debts and obligations. Additionally, it can be extremely difficult to dissolve a partnership business if the partners did not agree on a dissolution process from the outset. This makes it critical to have a partnership agreement. If you are not comfortable with the risk of liability that comes with sole proprietorships and partnerships, a corporation might be the best legal structure for your enterprise.

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