7 Business Ownership Types to Consider in 2024

How you start your business can have a huge impact on everything from how easy it is to run your business day-to-day to how you pay your taxes. You can also determine if and how you will be personally liable if your business is sued, and whether you can raise money by selling stock. That's why it's important to choose the right business structure for you and your business.

To help you make the best decision, here's an overview of seven different types of business ownership to consider, their pros and cons, and why they might be the best choice for your specific type of business.

Overview of Business Ownership Types

7 common business ownership types

1.Sole proprietorship

A sole proprietorship is a business entity that is not a corporation and is operated by a single individual. Sole proprietorships are easier to set up and operate because they do not have a formal business structure. In most cases, you can get started without any fees or documentation, unless you plan to use a fictitious name (DBA). Technically, you don't even need to open a separate bank account for your business, since any profits or losses will be reflected in your personal income taxes.

However, sole proprietorships come with significant risks of personal liability. Without an entity separating you from your business, not only the profits and losses pass to you, but the debts of your business pass to you as well.

“If your business is in trouble, so are you,” said John Morgan, CEO of Venture Smarter, a consulting firm specializing in startups and small businesses. “No one wants to jeopardize their car, their home, or their vintage record collection from college.”

Strong Points

• It's easy to set up with very little paperwork.
• Profits are passed directly to the owners.
• The owner makes all decisions.

Cons

• There is no liability protection.
• Insurance necessary to protect personal property.
• Unable to attract investors.

2. Partnership

A partnership is similar to a sole proprietorship except that two or more individuals jointly own the business. Who manages the business and how much responsibility each partner has depends on the type of partnership you form.

For example, a general partnership divides the management, profits, and responsibilities of the business equally among the partners. Conversely, a limited partnership allows one partner to have most or all control and responsibility and the other partner to have limited or no control and responsibility.

Limited liability partnerships (LLPs) fall somewhere in between, allowing the partners to be equal while protecting their personal assets from the business and each other. For example, if a lawyer in a law firm commits medical malpractice, a limited liability partnership protects the other partners from the consequences.

Strong Points

• Easy and inexpensive to set up.
• It is easy to operate and allows pass-through taxation.
• Partners can share talent and resources.

Cons

• There is no liability protection depending on the structure.
• It dissolves when one partner leaves or dies.
• the possibility of disputes arising between partners;

3. Company C

A corporation is a business that exists as an entity separate from its owners. Unlike sole traders or partnerships, corporations are legally responsible for their actions and can survive the death or retirement of their owners. There are several types of corporations, but most large business entities are C corporations or C corporations.

C corps, named after Chapter 1, C of the Internal Revenue Code, are owned by shareholders and pay corporate taxes directly to the IRS. Instead of profits and losses being passed to the owners (shareholders), the C corp pays taxes to his IRS and the profits are distributed to the shareholders. Shareholders are taxed on the profits they earn from the business.

Despite this double taxation of the business and its shareholders, C corps have several advantages over other types of business entities. First, you can have an unlimited number of investors, including foreign investors. Multiple classes of shares can also be issued.

Strong Points

• Provides limited liability.
• The company exists forever.
• Unlimited shareholders, including foreign investors.
• Multiple classes of shares can be offered.

Cons

• Configuration is more complicated.
• It is mandatory to hold a general meeting of shareholders and a board of directors meeting.
• Corporate profits are subject to double taxation.

4.S Corporation

An S corporation or S corp is also a separate business entity that provides shareholder liability protection, but it doesn't pay taxes to the IRS like a C corp. Rather, the S corporation's profits and losses are passed on to shareholders and are subject to personal income taxes. This avoids the double taxation that a shareholder would experience on her C corporation.

S corporations also have some restrictions that C corporations do not have, such as having no more than 100 shareholders. The business must be based in the US and the shareholders must be US residents. Finally, an S corp can only issue one type of stock, and some entities, including certain financial institutions and insurance companies, are not eligible to operate as an S corp.

Strong Points

• There is no double taxation.
• Provides liability protection.
• Allows companies to issue stock.

Cons

• The settings are complicated.
• Restrictions on Shareholders.
• It is more difficult to manage than an LLC.

5. Limited company

A limited liability company (LLC) combines the best of a sole proprietorship, partnership, and corporation. It is easy and cheap to set up and provides liability protection for businesses without the complex regulations and shareholders that come with it. Similar to sole traders and partnerships, profits and losses are passed to the owners in proportion to their ownership interest, and the owners charge income tax.

In addition to liability protection, LLC status gives a company a level of credibility. “Hobbyists don't have LLCs,” says attorney Steve Leplin. “Only serious businessmen go to the trouble of forming their own LLC.”

On the other hand, LLCs cannot raise funds or issue stock, which can limit your business. If you are planning to go public, a corporation may be a better option.

Strong Points

• Liability protection.
• Easy to operate.
• Business credibility.

Cons

• Operational costs are higher.
• Self-employment taxes are paid by the owner.
• Unable to issue stocks or raise funds.

6. Specified non-profit corporation

Nonprofit corporations are established to carry out charitable, educational, religious, literary, and scientific activities rather than to enrich their members. Because of this, nonprofits pay no state or federal income taxes, but to maintain their tax-exempt status they must adhere to strict rules about what they can use their profits for. For example, profits cannot be distributed to members. Instead, nonprofits must direct profits to charitable purposes.

Most nonprofit organizations are organized as corporations and apply for tax-exempt status under Section 501(c) of the Internal Revenue Code. Like other corporations, they file articles of incorporation with the Secretary of State where they are located, establish articles of incorporation, and hold regular board meetings.

Strong Points

• Tax exempt status.
• We can push the cause further.
• Eligible for public and private grants.

Cons

• Huge amount of paperwork.
• IRS scrutiny.
• Maintenance costs are high.

7. Cooperative

A cooperative, commonly referred to as a cooperative, is an association of people, organizations, or businesses designed to benefit the people who use its services. A common example is a food cooperative that sells food at low prices to its consumer members. Similarly, farmers can form cooperatives to buy supplies and share equipment as a group.

Members become part of the co-op by purchasing stock and either pay for goods and services or volunteer their labor in return (i.e., stocking the co-op's shelves).

Although not all co-ops make profits, co-ops distribute profits equally among their members, and all members have one vote regardless of how many shares they own. Because everyone has an equal say, decision-making may take longer than in other types of business structures. However, this is offset by the co-op's tax-exempt status for federal and most state income taxes.

Strong Points

• Pooled resources.
• It is operated for the benefit of members.
• There is no federal income tax.

Cons

• Slow decision-making process.
• Not the most profitable type of business entity.

Which business structure is best for your business?

Five key factors determine which business structure is best for your business:

• your industry.
• How much paperwork can you tolerate?
• Personal responsibility.
• Taxation.
• Fundraising activities.

industry

Certain businesses are better suited to one type of business ownership than another. For example, real estate investment companies prefer forming an LLC because it provides liability protection. Additionally, federal and state laws prohibit some companies from using certain business structures.

Office procedure

Sole proprietorships and partnerships require minimal paperwork, while businesses, including nonprofits, are on the other end of the spectrum. If you want to keep things simple, stick to a sole proprietorship, partnership, or LLC.

personal responsibility

In sole proprietorships and partnerships, responsibility shifts to the business owner or owner. This puts your personal assets at risk, but you can also purchase liability insurance to prevent this.

taxation

The type of business ownership you choose will affect how your business profits are taxed. For example, a C corporation pays taxes on its profits, distributes that money to its shareholders, and their shareholders pay income taxes on their profits. For sole traders, profits are reflected in the owner's personal income tax.

Fundraising activities

Some types of business ownership allow for financing, while others do not. For example, an LLC cannot issue stock, but an S corp can. S corps, on the other hand, are limited by the number of shareholders they can have and whether they can accept foreign investments, whereas C corps are not.

While it's important to choose the right type of business ownership initially, it's possible to change if you realize you made the wrong choice or if your company grows beyond its current structure. Please note that this process may have tax implications or may unintentionally cause the dissolution of your business.

Frequently asked questions (FAQ)