Types of Business Ownership
By Kristi Vaughan
Right up there on the top 10 list of questions every business owner must ask is, "What legal form should my business take?" From sole proprietorship to partnership to corporation, there are several options, each with advantages and disadvantages.
Legal and tax advisors can help you with the final decision but here is a primer on the essential differences.
Sole proprietorship
As the name implies, this is the solitary form of business ownership. You alone are the boss. You make all the decisions. Of course in the negative category, you also bear all the responsibility and assume all liabilities. Sole proprietorships are the most common form of small business ownership.
According to the federal a Small Business Administration (SBA) chief advantages of sole proprietorship are:
- Ease of organization
- Complete ownership control
- Owner gets all the income
- Business is easy to dissolve
Partnership
Another common form of business ownership is the partnership. There are many similarities with a sole proprietorship except there are two or more people involved. As with any relationship, this can work very well or be fraught with conflict. Small Business advisors recommend that you have agreements established early in the life of the business on such issues as level of involvement, and level of investment from each partner as well as procedures for dissolving the business or having a partner leave.
There are three types of partnership: General partnership, limited partnership and joint venture. A general partnership is the least formal arrangement. A limited liability partnership limits the liability, and involvement, of most of the partners. A joint venture is usually established for a limited period of time and for a specific project.
The SBA cites the following advantages to partnerships:
- Ease of establishment
- Increased ability to raise funds
- Partners get all the income
Corporation
Most commonly associated with larger businesses, incorporation also often is advised for small businesses. A corporation is the most formal of the business forms and requires filing forms with the state in which is headquartered. Unlike sole proprietorships or partnerships, a corporation limits liability to the owner - who in this case are considered shareholders.
There are several types of corporations - regular or "C" corporations and "S" corporations. The difference is in the tax treatment with earnings in an S corporation treated more like those of a partnership. A tax advisor and the federal Internal Revenue Service can best help you understand the tax advantages and disadvantages.
The SBA cites the following advantages to corporations:
- Limited liability for shareholders
- Ability to raise funds through sale of stock
- Deduct the cost of benefits provided to officers and employees
Getting advice
More information and help on determining the best form of ownership for your business can be fund through the SBA and by talking with representatives at SCORE, a nonprofit association of retired business executives that provides advice to small business owners.
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