Basic Forms of Business Ownership

Are you thinking of starting a business? What business structure is most suited for you? You may find the following discussion on the basic forms of business ownership helpful in making a guided decision.

There are three (3) basic forms of business ; namely sole proprietorship, partnership and the limited liability company. Today we provide some perspective on the pros and cons of these business types.

1. Sole Proprietorship

The sole proprietorship has only one owner, and is the form more frequently adapted by new businesses.

The advantages are (i) Easy to form (ii) Less government regulations (iii) The owner has ultimate control (iv) Profits are not shared with others. The disadvantages are (1) Limited ability to raise large sums of money (ii) The sole proprietor has unlimited liability, that is , if he/she loses a business-related lawsuit he/she could also lose his/her home, car or other personal assets (iii) The business normally dissolves with the death of the owner.

2. Partnership

Partnerships are similar to sole proprietorships except that there are two or more owners .

The advantages are (i) Easy to form with fewer government regulations than limited liability companies (ii) The partnership can bring together persons with different resources and talents for the mutual benefit of the business. (iii) Profits are equitably allocated to the owners. The disadvantages are (1) Limited ability to raise large sums of money. (ii) Owners will not always agree on key decisions, leading to management conflicts. (iii) Each partner has unlimited personal liability for business debts/obligations that are unpaid. (iii) The business normally dissolves with the death or withdrawal of an owner.

Limited liability company

A limited liability company or corporation is an entity that legally exists apart from its owners. Ownership is evidenced by possession of shares of stock. The owners have limited involvement in the business operations.

Some advantages are (i) Limited liability of owners/directors ; their personal assets are protected from judgments and default on company debts. (ii) Ease of Transfer of ownership through the transfer of stock. (iii) Ability to raise large sums of capital. The disadvantages are (1) Difficult and costly to establish (ii) subject to dual taxation on earnings and dividends paid to stockholders (iii) High legal and accounting costs (iv) Bankruptcy even at the corporate level does not discharge tax liabilities.

We trust you find this discussion helpful as you seek to form , grow and /or develop your business. More to come in this forum. Do like &/or leave a comment.