Types of Business Ownership - Students Explore

Types of Business Ownership

Different Types of Business Ownership

Being a business owner your first decision is how your business organization should be structured. What kind of advantages and disadvantages you will have to face in the decided business organization structure. Because it will affect your business in future, therefore it is necessary to choose most suitable business organization according to your business investment. You need to consider it how big or small your business is and so on. Basically there are four types of legal business ownership/organization, listed below:

  1. Sole Proprietorship
  2. Partnership
  3. Limited Liability
  4. Corporation

 

What is Sole Proprietorship?

The most small business start out as sole proprietorships. These firms are owned by one person who is normally active in running and managing the business and only one to own benefit. This type of business is alive or exist till the owner is alive and running the business, once the owner dies, means the business dies, ceased.

Advantage of Sole Proprietorship

  • It is easy to establish. For example, one man can start his small burger shop, or may be general store etc.
  • It is flexible, smooth and easy to run the business due to its small form of business organization.
  • All the profit earned, goes into the pocket of owner only.
  • Profit taxed only once. Owner make all the decision himself and control it.

 

Disadvantages of Sole Proprietorship

  • Unlimited liability in case, anything happened to the business. Your personal assets are at risk.
  • It is limited in raising funds.
  • It may have to take a loan
  • It has no legal status.

 You May Also Read:  What is Accounting – A Basic Overview

 

Partnership

A partnership is two or more people who share the ownership of a single business. In order to avoid misunderstandings about how profits/losses are shared, who’s responsible for what, and other management, ownership, and operating decisions the partners normally have a formal legal partnership agreement.

Advantages of Partnership

  • It is easy and inexpensive to establish.
  • The required capital will be shared amongst the partners.
  • Total Profit will be shared amongst the partners.
  • It has a separate legal status to give liability protection
  • Profit taxed only once.

Disadvantages of Partnership

  • Each partner is equally responsible for the debt or loss, if any.
  • Partnership agreement will end, if any one of them decided to end it.
  • Business will be endanger, if the partnership agreement lost or not in place.

 

Corporation

A corporation is an organization that is made up of many owners who normally are not active in the decision making and operations of the business. These owners are called shareholders or stockholders. Their ownership interest is represented by certificates of ownership (stock) issued by the corporation.

 

Two Types of Corporations

  1. Regular or ”C” Corporation
  2. S-Corporation

 

Regular or ”C” Corporation

Earning are taxed to the corporation. Shareholders not personally liable for income taxes unless dividends are paid.

Advantages of C-Corporation

  • It has limited liability.
  • Ownership can be transferred.
  • Shares can be sold out by their shareholders.
  • Capital can be easily raised through the sale of stock.
  • It has tax benefit and also it paid the fringe benefit.

Disadvantages of C-Corporation

  • It has double taxation disadvantage.
  • Lot of formal administrative duties, more paperwork and annually conducting meetings program and then making minutes of meetings etc.
  • It has to pay corporate tax.

 

S-Corporation

It is also known as subchapter. It is special type of corporation allowed by the internal Revenue Service (IRS) that passes or transfers its earnings to the individual shareholders who personally pay the income taxes.

Advantages of S-Corporation

  • It has limited liability.
  • Only one time profit taxed.
  • It avoids the double taxation.
  • Capital can be easily raised through the sale of stock.
  • Stock can be sold to raise the capital

Disadvantages of S-Corporation

  • It is costly to form a S-Corporation.
  • It is limited only to the Individuals and trustees.
  • Lot of formal administrative duties, more paperwork and annually conducting meetings program and then making minutes of meetings etc.
  • It do not provide fringe benefit alike S-corporation.

 

Limited Liability Company (LLC)

The Limited Liability Company (LLC) is a relatively new type of business structure that combines the benefits of a partnership and corporation.

Advantages of LLC

  • It has Unlimited owners.
  • It has separate legal entity.
  • It usually pay tax as sole proprietorship.
  • Profits is shared in the owners without double taxation.
  • Limited liability to the owners in case of debt or any loss.

Disadvantages of LLC

  • Its ownership is limited by certain state laws.
  • Its agreement is usually typical and complex.
  • It is costly to form due to higher fee of filing and legal duties.
  • Accounting as well as legal assistantship is required.
  • Lot of formal administrative duties, more paperwork and annually conducting meetings program and then making minutes of meetings etc.

 

Dear Students Explorer!

I hope you would have understand and differentiate the types of business ownership, still you have any problem, you can ask question on comment section.

 

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