As an entrepreneur, the nature of your company determines the type of business ownership that you will register.
In this article, we’ll look at five types of business ownership so that you can make an informed decision about which style aligns with your goals and vision based on their advantages and disadvantages.
1. Sole Proprietorship
Suppose you’ve recognized a need in the market for your product or service and intend on establishing, running, and reaping the fruits of your efforts on your own. In that case, this ownership type is most suitable because a single individual founds it, and corporate legislation recognizes that person and the company as one entity. Examples of this are your local grocery and clothing stores. Freelancers and consultants also qualify under this category.
Pros – This type of organization is easy to set up. As the owner, you have complete control over the business and receive all profits.
Cons – If you have underestimated certain risks or have made a wrong business decision, you are personally liable for any and all losses. Also, if your business evolves to the point where you want to partner with another person, you’ll have to dissolve the company and establish a proprietary limited (Pty Ltd) company.
Suppose you share a common vision with someone, and you both strongly believe in the business plan’s probability of success. In that case, this ownership type allows for two or more people or entities to put up the money to fund their business to achieve a shared goal. Besides registering and submitting annual reports, you will need a formal agreement that documents how to run operations and how you intend to share profits and losses. Examples of this type of arrangement are brands endorsed by celebrities. Such as the partnership between Adidas and Kanye West, where the award-winning hip-hop artist with the platform to build Adidas’ streetwear segment led to a spike in their revenue.
Another illustration of a mutually beneficial business relationship is the partnering of Starbucks and Spotify, where users play music from the audio streaming service to create an atmosphere at branches of the multinational coffee house. At the same time, their patrons can enjoy a cup of their premium beverages. In addition, customers could themselves create playlists through the Starbucks App, where musicians also get exposure through the platform.
Within this ownership type, there are different models such as:
General: Businesses registered in this category don’t have to form through the state, and partners have independent power when signing contracts and applying for loans. However, each individual or entity also has total liability and is personally responsible for all business debt and legal obligations.
Limited: The state has to authorize this kind of partnership, and at least one partner is fully responsible for running the business. Other partners may fund the company but not necessarily have to manage it as would investors.
Limited liability: In this case, all partners are active in operating the business and are all responsible for the debt and legal liabilities, but not for errors and omissions of fellow partners. However, not all states allow this model, which is restricted to certain professions, such as lawyers and accountants.
Pros – Two (or more) minds are better than one in this type of business ownership, where the power of the combined knowledge and experience can limit potential pitfalls and fast-track the company’s growth. There is also more cash to run the company as owners share business expenses.
Cons – This divided responsibility, however, also means there needs to be a consensus for business decisions as shared control also means shared liability.
3. Limited Liability Company (LLC)
Not to be confused with the ‘Limited Liability Partnership (LLP),’ as described above, in an LLC, there is a financial barrier between owners and the company. In other words, business creditors can’t go after the owners’ personal assets, and if the company goes into debt or bankruptcy, your personal assets are not at risk of being seized.
Pros – The benefits of an LLC are that owners’ personal assets are protected. Also, they do not have to pay additional taxes because the state considers this type of business as self-employment.
Cons – A drawback, however, is higher start-up costs and self-employment taxes.
There are also various corporation ownership types such as:
C corporation: In this instance, the business is its own entity, separate from its owners, where individuals, for example, buy company shares while legislation protects their personal assets. Publicly traded companies like Microsoft or Apple run on this business model.
B corporation: Although this ownership type benefits the public, it does so for a profit. An example of this is Oliberté, a premium leather goods company that “sustainably sources its materials from and manufactures in Africa to create pathways out of poverty.”
Close corporation: Members run and administer this type of model, and, similar to an LLC, they benefit from liability protection. Examples of this corporation style include Deloitte and PricewaterhouseCoopers (PwC.)
Non-profit: This business ownership type exists for the common good, so it’s not liable for taxes. However, owners must reinvest any money made back into the company. Charities and religious organizations are examples of close corporations, as are scientific institutions.
Pros – Because developments and progress made in businesses of this nature encourage advances in technology and benefit society, they have access to good funding.
Cons – Corporations, however, still have to pay income taxes.
The last ownership type we will look at in this write-up is cooperatives. This business category is private because it is owned by individuals that use products and services such as agriculture, insurance, financial services, housing, and utilities. Examples of this model in action are Affiliated Foods Inc., Associated Grocers, CoBank, Farm Credit Bank, 21st Street Co-op–a student housing cooperative in Austin, Texas–and National Rural Utilities Cooperative Finance Corporation.
Pros – As with partnerships, expenses are split among owners.
Cons – Because many stakeholders are involved in the running of cooperatives, its members have reduced control.
This article has looked at the different types of business ownership and how deciding on which to go with depends on the skills needed to drive business, whether you want complete control over operations, and your risk tolerance. We also saw examples of each and the case for and against them.