When starting your small business you will find that there are 5 main forms of business ownership to choose from, which are listed below. Each has it’s advantages and disadvantages. The form of business ownership you choose will directly affect how much taxes you have to pay and what business licenses and documents you will need. Many small businesses start as one form of ownership and changes to another as it grows. This is perfectly acceptable, you are not bound to your first choice. You can decide to hire a lawyer or an attorney who specializes in small businesses to help you choose a form of business ownership and ensure you have all the required permits and license. If you do not choose a form of business ownership, one will be given to you by default; if your business has one owner it will be a sole proprietorship and if it has two or more owners it will be a partnership.
5 Main Forms of Business Ownership
Sole Proprietorship– A sole proprietorship is owned by only one person. This is the most common form of business ownership.
General Partnership– A business owned by two or more people. The partners share ownership and control of the business.
Limited Partnership– A limited partnership consists of at least one general partner (controls the business) and at least one limited partner(investor).
Forming a Corporation– A corporation is a business which is considered a separate entity from you; even having the legal rights of a person. There are two types of corporations; C Corporations and S Corporations.
Limited Liability Company– The new “It” thing in the world of entrepreneurship. It’s popularity has been steadily growing in the past years. What attracts entrepreneurs to this business structure is that it provides the limited liability provided by corporations with out all the restrictions and taxes.
Evaluate the following factors when comparing forms of business ownership:
- Limited Liability– limited liability ensures that your personal assets are not at stake to cover business debt. For example in a sole proprietorship you do not have limited liability so if someone sues your business your car, house, and money are at stake. In a corporation you do have limited liability so your personal belongings are not at stake.
- Taxes– Some forms of business ownership are taxed more than others. For example C Corporations are subject to double taxation.
- Raising Capital– It is easier to raise money for certain business structures over others. In a corporation for example, you just need to sell shares to raise money, however keep in mind that when you sell shares you are selling a portion of ownership.
- Licenses and Permits– Some forms of business ownership are more complicated to set up. A corporation for example needs more paperwork and is more expensive to set up than a sole proprietorship.