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Business ownership can be tricky to grasp. Learn what types of business ownership structures there are and how to choose the right one.
When launching a new business, one of the steps you need to address from the beginning is the type of business ownership for your venture. Selecting the right model might help you succeed or make things more complicated in the future, as each ownership model has pros and cons.
In this article, you'll find some questions to ask before defining your business's ownership model, mistakes to avoid, and types of structures available so you can choose the one that best suits your business plans and expectations. Keep reading!
Related: Becoming A Business Owner: Humble Learnings From A Successful CEO
Preparing to choose the best business ownership model means having clarity around the following:
Related: From a marketer to business owner: How Derek Delost found his passion
As a business owner, choosing the structure can significantly impact your company's future. Here are ten types of business ownership to consider.
As the name suggests, the sole proprietorship business structure allows only one person to own an unincorporated business. On the positive side, sole proprietorships enable business owners to reap all the profits. However, they're also the only ones who will be held accountable if there are business debts to pay or losses. Besides, a sole proprietor must pay personal taxes based on all business profits.
The sole proprietorship is the simplest business structure to create. Because of that, it's the go-to choice of contractors or consultants. Many small businesses begin like this, only to move to more complicated structures later.
General partnerships (GP) require two or more people to be established. These individuals are known as general partners and have unlimited liability regarding the business's obligations. In case of failure, partners might have to use their personal resources to cover any obligations.
A general partnership is formed through a partnership agreement that states how the partnership should be governed, the partners' rights and responsibilities, the percentage of profits for each partner, what will happen in case of a partner's death, and many other details.
General partnerships are less expensive and easier to establish than other business structures involving partnerships. This structure is a good choice for businesses providing services, such as medical practices or law firms.
With a limited partnership, two or more partners own the business. The structure must include a general partner who will run the organization and has unlimited liability for debts. Meanwhile, the other partners will have liability up to their investment amount.
This business structure is typical for business owners looking for investments in the real estate industry.
Partners can benefit from a limited partnership since they'll be held accountable only for the amount of money they put into the business. Regarding taxation, limited partners don't have to pay self-employment taxes, but they can't make any management decisions.
In an LLP, organization members have limited liability for business debts or legal claims. Each partner will be held accountable according to the amount of capital they contributed. It's common to find LLPs in law firms, accounting firms, and medical practices.
Limited liability partnerships focus on growing the business without significantly increasing resources. One unique trait of an LLP is the existence of junior partners who, after several years of work, can reach the status of "full partner."
In a C-corporation, shareholders are taxed separately and the legal entity is also subject to taxation. This business entity should have mandatory annual meetings and a board of directors which is chosen and voted by investors.
C-corporations limit the personal liability of anyone who is involved with the organization. By selling stock options, the company can gather high amounts of capital. However, creating a C-corporation can be expensive since you have to cover legal fees. Besides that, these organizations should register with the Securities and Exchange Commission (SEC) when reaching a certain size.
In the LLC business structure, partners have limited liability that protects them and their assets from lawsuits and creditors. The regulation for these organizations will change according to the estate where they reside.
Limited liability companies' profits aren't taxed; partners report them on their tax returns.
Partners in a limited liability company can forget about double taxation, (regarding the business and their personal taxation). Also, it's easier to include many expenses as business deductions. On the downside, partners will have to pay self-employment taxes if you choose a pass-through taxation.
For example, since a limited liability company can protect the business partners, medical groups are registered under this business structure. This way, they can avoid potential lawsuits affecting the whole business.
The main goal is to avoid double taxation on corporate profits by passing income, credits, deductions, and losses to the shareholders. This organization is only available to companies with under 100 shareholders. In an S Corporation, shareholders become responsible for paying income-related taxes.
With this structure, businesses can avoid spending extra money by paying taxes. Employees from an S corporation can be shareholders and be able to receive dividends. At the same time, companies with this structure undergo much scrutiny from the IRS since the government entity is ensuring the business is paying taxes. Also, setting up an S corporation can be expensive and time-consuming.
Nonprofits focus on social causes to positively impact society. They are created for charity and are not looking to make any profit.
NPOs can be found in different fields: religion, science, education, health, and the environment, to name a few. Because of their mission, nonprofits can gain a "tax-exempt status."
Also known as B Corps, these organizations seek profit without neglecting the idea of positively impacting the environment. Through a benefit corporation, shareholders expect profits. At the same time, the company is responsible for what it does for a social cause. Patagonia is an example of a B Corp.
In this business structure, only a few shares are held by a limited number of individuals related to the industry. The general public can't acquire stocks from these corporations since they are usually held by families, owners, or even managers.
What is the purpose of your organization? Will you focus on working for a social cause? Generate profit? Or do you want to bring in income while working for social impact? First, you need to know your goals and expectations for your venture to understand what kind of structure will be the best for you.
Taxes can be frightening, but choosing an organizational structure solely based on taxes can make you sign a commitment that isn't the best for you in the long run. Don't prioritize taxes (with the idea of avoiding them); don't forget them. You need to give them the exact relevance to avoid picking the wrong option that will bring you extra paperwork for your business or partners.
What might be the best option for the immediate future might be in the opposite direction of the path that will take you closer to your mission. There is no correct answer here since it depends on your business, goals, resources and long-term vision.
Some structures may require more time and resources than others, but this shouldn't stop you from selecting the best option for the future of your business.
Are you ready to acquire or sell a business? With Boopos, you can make the whole process easier and seamless.
When starting your exit journey through our marketplace, our expert team of advisors will give you full visibility and guide you through the business transfer process. Contact a Boopos advisor today and walk away with insights on market trends and a first assessment of the value of your business.
Disclaimer: The content of this post is for informational purposes only and does not constitute legal or financial advice.
