Before launching your new venture, you’ll need to determine which type of business ownership works best for your situation.
Here are the pros and cons of the five main types to consider:
What is it? A business owned and operated by an individual. It is the most common type of business ownership in the United States.
Pros: You own your own business, you’re in control, and you’re not beholden to anyone. It’s straightforward to form and isn’t subject to much governmental regulation (it’s usually not registered with the state).
Cons: The business is yours and yours alone. That’s a good thing, right? Well, that also means the debts the business incurs become personal debts. If the business takes a big financial hit, you may go down with it. Also, a lawsuit against your business could spell major trouble.
Also consider: It can be difficult to secure financing. You also have unlimited responsibility in this business model. You’ll be the CEO, the accountant, the janitor, and everything in between.
What is it? Ownership is split between two or more people, and it is the least common type of business organization.
Pros: You can divide the responsibilities. If the relationship between partners is good, it’s a strong business.
Cons: If the relationship fractures or sours, the business may well gown down with it, as the actions of one partner affect the others.
Also consider: A partnership can be general or limited. A general partnership is a simple written agreement between people to run the business as they mutually see fit, and each has unlimited liability. In a limited partnership, the owners have only as much liability as they invested.
A private corporation
What is it? A legal entity created by the state and whose assets and liabilities are separate from its owners. It is owned by a group of people who manage the business.
Pros: A huge plus is limited liability — that is, owners can only lose as much money as they invested—and it has an unlimited life span, which means that it will continue to function even after the owners die.
Cons: Double taxation — the business and its shareholders both are required to pay taxes.
Also consider: In order to found a private corporation, the owners must submit a legal document called the articles of incorporation to the state in which the business will function.
A limited liability company (LLC)
What is it? A company where owners don’t have personal financial ties to the business and thus are not personally responsible for losses that may be incurred.
Pros: Even if an LLC loses a tremendous amount of money, the owners won’t be responsible for the debt. An LLC is a good choice if you are going to be engaging in risky financial maneuvers.
Cons: With no set corporate structure, investors may be hesitant to put money into an LLC.
Also consider: An LLC, like a private corporation, must be registered with the state and comply with its laws.
A nonprofit corporation
What is it? Organizations that promote charitable, religious, educational, environmental, scientific, literary efforts or productions.
Pros: A nonprofit can solicit grant money from public and private entities to fund projects. In general, grant money is not taxed like regular profits; tax exemptions exist to benefit nonprofits.
Cons: Nonprofits typically have a shared control structure, which is not necessarily bad unless you are looking to solely direct an organization.
Also consider: This is the ownership model you’ll choose if your business is charitable or otherwise for the public’s benefit.
The bottom line
Owning a business, alone or in a partnership, is a big responsibility. By choosing your ownership model wisely, you’ll be that much closer to success.