Business Ownership 6
Running Head: BUSINESS OWNERSHIP 1
Essay: Business Ownership Structures
Businesses tend to vary not only in size and industry, but also in their ownership. Some businesses are owned by one person or a small group of people, others are owned by shareholders and in some cases some businesses are owned by the state. Different business forms lead to different legal formalities for each structure (Burns, 2016). A business’ legal and ownership structure determines many of its legal responsibilities, such as the paperwork required to set up the business, the taxes the business has to pay to the government, how profits from the business are distributed with equality and equity, and the owners’ personal responsibilities in case the business goes bankrupt or makes a huge loss that cannot be recovered or compensated (Berk et al., 2013). In order to appreciate the diversity of businesses, it is important to know the different forms of businesses that are privately owned, state owned and owned by charitable organizations. However, legal forms and ownership structures differ from one state to another. This paper looks at the most common forms of business ownership, the advantages and disadvantages of each, the ease of their formation and management, their attractiveness to outside investors as well as their taxation.
Sole proprietorship is a form of business structure where the business is owned by a sole proprietor, that is one person who runs the business as an individual and also provides capital for the business. In sole proprietorship, there is no separate business entity, in that there is no distinct difference between the owners’ personal assets and his/her professional assets and liabilities (Novak, 2019). This form of business ownership is usually easy and simple to start since it does not require much capital. It is a good option for someone who wants to venture into low-risk business on a trial and error basis (Novak, 2019). Nonetheless, sole proprietorship has its own fair share of its advantages and disadvantages. Since the business has no separate business entity from the owner, the owner becomes responsible and liable for any requirements the business might have. The table below shows the advantages and disadvantages of sole proprietorship.
Requires minimal startup cost
Has unlimited liability
Has little restrictions
Difficult to raise capital
No additional federal taxes
Decision making is done by one person
Benefits of teamwork, faster decision making and improvement of quality (Daroń, 2017)
Risk of disagreement between partners
Low capital needed
Divided profits among partners
Greater borrowing capacity (Novak, 2019)
There might be a potential of unlimited liability
Partnership is a kind of business structure where two or more people share the ownership of the business. There are two types of partnership: general partnership (partners are generally responsible and liable for any debts or losses) and limited partner (partners are not liable if the business faces any loses or debts). Profits are shared equally among the partners and each partner pays taxes on their share (“Different types of business,” n.d.). In addition to this, partnership has its advantages and disadvantages and they are outlined in the table below.
Limited Liability Company (LLC).
A limited company is a legal person in that it can own property (“Different types of business,” n.d.). It, however, separates the owners’ assets. In case the company goes bankrupt, the owners’ assets and liabilities are safe as they are a separate entity from the company. The owners of the LLC are referred to as members (Bulaki, 2020). A single person can form an LLC while there is no limit to the maximum number of people who can join or form a Limited Liability Company. It also has its advantages and disadvantages as discussed in the table below.
It is capital intensive
Flexibility of income distribution
No perpetual existence
Confusion across states
Corporations and S corporations.
A corporation is a business recognized by the state and has a separate legal entity from its shareholders/ owners. The ownership of a corporation can be transferred through buying and selling of stocks (Schooley, 2020). Corporations are usually governed by a board of directors elected by the shareholders. There are two main types of corporations: C Corporation (Double taxed) and S Corporation (Not double taxed) (Schooley, 2020). Each of the corporations have their own pros and cons.
Stock provides good funding
No double taxation
Once it attains a certain provided amount, it is double taxed
Choosing the right legal structure is important before venturing into a business. There several factors that one should consider when choosing the right structure. They include: flexibility, liability, taxes, complexity, control, capital investment, licenses, permits and regulations. Choosing the right structure largely depends on the type of business (Stowers, 2020). The startup financial needs, risks and ability to grow in the future should be considered too before starting a business.
Considering the varying factors for a startup, small and medium-to-large business, there are advantages and disadvantages that associate with owning a business. One of the advantages is financial reward. A business owner is able to reap what he sows with the chance of making more money from the risks taken. Also, owning a business gives one the advantage of enjoying lifestyle flexibility and personal satisfaction and growth (Leonard, 2019). As much as there are advantages to this, there are disadvantages too. They include: financial risks, stress and health issues and time commitment. Considering the pros and cons of all the types of business structures, it is safe to conclude that all the business structures are important and they co-relate to each another in one way or another. However, it is vital to have clear reasons and objectives before starting up any business using the different types of business structures.
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V., & Finch, N. (2013). Fundamentals of corporate finance. Pearson Higher Education AU.
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Burns, P. (2016). Entrepreneurship and small business. Palgrave Macmillan Limited.
Daroń, M. (2017). A Verification of Advantages and Disadvantages in Partnership Relations. Zeszyty Naukowe Politechniki Częstochowskiej. Zarządzanie, (27), 96-105.
Leonard, K. (2019). Advantages & disadvantages of owning your own company. Small Business – Chron.com. https://smallbusiness.chron.com/advantages-disadvantages-owning-own-company-21125.html
Novak, M. C. (2019, June 21). 5 types of business ownership (+Pros and cons of each). Learning Hub | G2. https://learn.g2.com/types-of-business-ownership
Schooley, S. (2020, September 10). Advantages and disadvantages of a corporation – businessnewsdaily.com. Business News Daily. https://www.businessnewsdaily.com/15805-corporation-advantages-and-disadvantages.html
Stowers, J. (2020, January 9). A guide to choosing the best legal structure. Business News Daily. https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html