Business Ownership

 

Choosing the right form of business ownership is important because the form of ownership you choose will determine how your business is organized, how the money that flows in and out of your business is handled, and how your business is taxed. Use this comparison of the four types of forms of business ownership to help you choose the best form of business ownership for you when you’re starting a small business.

Form of Business Ownership Choices

There are essentially four forms of business ownership:

  1. the sole proprietorship,
  2. the partnership,
  3. the corporation
  4. the cooperative.

Let’s look at the main advantages and disadvantages of each of these forms of business ownership.

The Sole Proprietorship

Advantages

  • Easiest and most inexpensive to set up.
  • Owner solely controls the business.
  • Tax reporting is simple (does not require a separate corporate tax return).

Disadvantages

  • Unlimited personal liability as there is no separation between the business and the owner.
  • Can be hard to raise capital via debt or equity financing (banks are reluctant to lend to sole proprietorships and there are no shares to sell to equity investors).
  • Difficult to sell.

The Partnership

Advantages

  • Shared risk.
  • Shared management.
  • Tax reporting is simple (does not require a separate corporate tax return).

Disadvantages

  • Risk of conflict between partners.
  • Either partner can be held responsible for business debts incurred by the other partner.
  • Shared decision making.
  • Buyouts can be problematical (when one partner wishes to quit the business).

The Corporation

Advantages

  • Limited liability – owners are not responsible for company debts or obligations.
  • Easier to raise capital from investors or financial institutions.
  • Being incorporated is often a requirement when doing business with governments or other businesses.
  • Business income can be paid out in the form of salary or dividends, allowing you to optimize your tax situation.

Disadvantages

  • Most expensive form of business to set up and maintain.
  • Involves a lot of ongoing paperwork (must file annual business tax returns).

The Cooperative

Advantages

  • Owned and controlled by its members.
  • Limited liability.

Disadvantages

  • Decision making can be slow.
  • Risk of conflict between members.

Forms of Business Ownership and Business Registration

The form of ownership you choose determines the business registration procedure you need to follow. Registering a sole proprietorship is easier and more inexpensive than registering a corporation, but as you see from the advantages and disadvantages above, there can be compelling reasons why you would want to go to more trouble and expense when you are setting up your new business.

The most common reason to incorporate a business from its inception rather than just setting up a sole proprietorship or partnership to start is the issue of liability; as sole proprietors are their businesses, legally, whatever debts or liabilities a business acquires are also the individual owner’s.

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