Types of Business Ownership, and their Pros and Cons

Choosing a type of business ownership is one of the most important decisions to make when starting a business. There are multiple options, each with its benefits as well as limitations.

In this post, you will learn the 5 different types of business ownership and the pros and cons of each.

Types of Business Ownership

1. Sole Proprietorship

This is the type of business that everyone is already familiar with. The woman running the shop down your street is a sole proprietor. Same for your neighbourhood barber and his friend selling fast food.

Funny, right?

A sole proprietorship type of business ownership is the most simple and easy to run. However, it also comes with some risks.

Advantages of Sole proprietorship

The business owner has the ultimate control over all business assets and revenue
It’s the easiest and fastest type to start
Your ownership can’t be challenged
The business owner can not be taxed twice, as the personal and business assets are merged

Disadvantages of Sole Proprietorship

Startup capital and other investments might be difficult to raise
If the business fails, the business owner will have to bear all lose
In the event of bankruptcy, the business owner will have to sell off his/her personal properties to settle the debt
The business may find it hard to continue after the death or absence of the owner

2. Partnership

In a partnership business, two or more individuals are involved. Mind you, they don’t need to have equal shares.

The partnership type of business ownership is of two types.

Limited Liability Partnership

In a limited liability partnership, a partner can’t take responsibility for a loss incurred by another partner.

If the partner’s action causes the business to close down or bankrupt, the other partners can only lose the capital they invested.

Unlimited Liability Partnership

In an unlimited liability partnership, each and every one of the partners are equally responsible for the business. If one of the partners causes a loss, all the other partners will pay for it, even though they’re not directly responsible.

Advantages of the partnership type of business ownership

It’s easier to get startup investments
Division of labour is very easy
If one of the partners dies, the business will still carry on

Disadvantages of the partnership type of business ownership

No specific partner can claim ownership of the business
Partners must settle liabilities, no matter the partner responsible for it
Since multiple people are involved, disagreements will happen from time to time

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3. Limited Liability Company (LLC)

A limited liability company offers more legal protection than sole proprietorship and unlimited liability partnership.

If the business incurs a bad debt, the personal assets of the owner(s) are protected and can’t be used to settle it. The law treats the personal properties of the owner(s) as a separate human being.

Advantages of a Limited Liability Company (LLC)

The business can use many tax structures
It is also eligible for tax deductions, in cases where there are major losses
The owners and shareholders cannot be held responsible for liabilities

Disadvantages of a Limited Liability Company (LLC)

This type of business ownership is more expensive to start
Investors may be afraid to invest, as other partners and shareholders can’t refund the money if the business fails
Self-employment taxes also apply to profits and salaries

4. Cooperative

A cooperative is a privately-owned business. The owners and shareholders are the same people who benefit from it. Everyone in a cooperative business has a say in the decision-making process.

In a cooperative type of business ownership, there’s no limit to the number of owners.

Advantages of Cooperative Businesses

It’s very easy to get capital investment
Each shareholder has democratic rights
People with the same background, ethnicity, religion, academic prospect or cause can easily form this type of business ownership

Disadvantages of the cooperative type of business ownership

Many owners are involved. As a result, it may take a longer period to make certain decisions or reach agreements
Many shareholders are involved. This means fewer profits, as the profits will be shared among all

5. Corporation

There are many types of Business Corporations, each one having its Pros and Cons.

C Corporation

This is a privately-owned business that is allowed to have an unlimited number of shareholders. Note that owners are taxed separately from the business.

Advantages of a C Corporation

The business can get investments by selling part of the company stock
The liabilities of the business cannot become the debt of any shareholder

Disadvantages of C Corporation

The business pays an income tax on all profits
Strict record-keeping is required for this type of business ownership.

Close corporation

The owners and shareholders of a close corporation are limited and closely involved in that business.

If one of the shareholders wants to exit the business, he/she can only sell his/her shares to a fellow shareholder. Outsiders are not allowed to own stock in that company.

A close corporation is also known as a “privately held company,” “private company” or “family corporation.”

Advantages of a Close Corporation

Everyone knows each other, both professionally and personally
The personal assets of the owners are protected
The owners have more freedom, as there’s no pressure from public shareholders

Disadvantages of a Close Corporation

The company stocks can be sold publicly or to outsiders
Each shareholder and owner has more responsibility

Nonprofit Corporation

This is a type of company that exists to further a cause and serve humanity. It has no aim to make a profit.

Advantages of Non-profit Corporations

All the personal assets of the owners are protected
Such companies are eligible to receive government grants
There are many funding opportunities
Taxes can not be deducted from donations

Disadvantages of Non-profit Corporations

This type of business requires a high startup cost
There will be very strict rules and reviews on how funds and donations are spent

Benefit Corporation (B Corps)

Unlike non-corporations, a benefit corporations serve humanity while also making profits.

Advantages of Benefit Corporations

Investors are motivated to invest since there will be some profit
Such companies can gain connections with similar companies

Disadvantages of Benefit Corporations

Certifications are very expensive
There are very strict rules to be followed if the company wishes to continue existing

The Bottom Line

It’s important to choose a type of business ownership that benefits your business.

And remember, your type of business ownership also determines the structure and some other things, such as the amount of taxes, protection of personal properties and many more.