Starting a business is a big decision that comes with a lot of challenges. The first challenge business owners face is deciding the ownership structure they want to use. This structure will be heavily influenced by the type of business ownership employed.
Each business ownership type has its unique advantages and disadvantages which contribute to the decision-making process. Understanding ownership is essential before setting up your own business. Let's take a closer look.
What is business ownership?
Business ownership provides a management framework for business owners. Thus, understanding the various types of ownership is essential to these folks.
Business ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions.
The legal structure of a business is crucial in its ramifications, so it must be understood and planned out carefully. The decisions involved impact daily operations, taxation, and the level of risk.
The legal structure is the framework through which a business is defined in a particular jurisdiction.
Types of business ownership structures
There are six basic types of business ownership structures:
Sole Proprietorship
Partnership
Private limited companies (LTD)
Public Limited Companies, PLC
Not-for-profit organisation
Cooperatives.
Let's examine the structures in a bit more detail, along with some advantages and disadvantages of each.
1. Sole proprietorship
This is the most common form of business ownership and the simplest. Sole proprietorship means that a business is owned and directed by one individual. This individual owns all the rights to run the business however they deem fit. In other words, if you start a brand new business, and you are the only person owning and running the business, it is considered a sole proprietorship (sole trader).
Advantages of a sole proprietorship
All income earned belongs to the sole proprietor, who also owns all business assets.
It is the simplest of all the business structures to set up.
It provides the proprietor with flexibility in running the business.
The sole proprietor gets to make all business decisions.
Absence of corporate tax.
Disadvantages of a sole proprietorship
The proprietor bears personal responsibility for all business debt and losses.
There is little to differentiate between personal and business income.
Raising capital is the responsibility of the sole proprietor.
2. Partnership
This business ownership structure means two or more people own a business. Partnerships are of two types, namely:
General partnership - this involves an investment from all partners, and all partners bear the responsibility for any debt incurred by the business. The partnership usually doesn’t need a formal agreement as it could be verbal between business owners.
Limited Liability Partnership, LLP - LLP provides protection for each partner against debt incurred by the other partner(s). It usually requires a formal agreement between partners to protect each from the actions of the others.
Advantages of partnership
Business capital can be easily generated from each partner's resources.
Profits from services offered by the business are shared between partners.
Ownership and decision making are shared by partners .
Greater capacity for loans.
Disadvantages of partnership
Partners are responsible for losses or debt incurred by the business.
The risk of friction among partners can be high.
Partners can be held liable for the actions of other partners.
3. Private limited company/LTD
A private limited company - also referred to as LTD - is an incorporated business entity that is privately held and controlled. The ownership of the business is divided by shares in the company. Those who own the shares are known as shareholders.
This type of business ownership provides limited liability to the owners. Limited liability provides the shareholders' personal assets with protection from liabilities incurred by the business.
Advantages of private limited companies
Private limited companies provide limited liability to their shareholders.
Shares cannot be sold to the public (the current owners decide to whom they will sell them). Therefore the company is protected from loss of ownership and control.
Due to incorporation, LTDs can continually exist even after the death of an owner.
Disadvantages of private limited companies
Shares can only be sold in-house, and can’t be traded with the public.
It is expensive to set up due to administrative and legal costs.
They must be registered with the company registrar.
Legal paperwork is necessary for starting up an LTD.
4. Public Limited Company/PLC
A public limited company - also known as PLC - is a business ownership style unique to the United Kingdom, although it is equivalent to what is known as corporation in other countries. A PLC is an incorporated business, meaning it exists legally as a separate entity from its owners. It also has limited liability, as it offers protection to its shareholders from business liabilities.
A PLC is managed by a board of directors and owned by shareholders. A PLC's shares can be traded with the public on the stock exchange.
Advantages of limited liability companies
Capital can be easily generated through trading shares publicly.
Owners have limited liability.
Publicly listing shares makes it easier to attract investors.
Disadvantages of limited liability companies
Anyone who can afford to buy a share can be a shareholder.
A board of directors is needed to run the organisation.
They are exposed to public scrutiny and regulations.
They may be at risk of a takeover if someone buys up a majority of the shares available.
5. Non-Profit
A non-profit organisation has been established for purposes other than profit generation. The organisation's generated income does not go to the owners or members. Examples include Amnesty International and the Boy Scouts.
Advantages of a non-profit organisation
It easily attracts talent interested in the mission of the organisation.
Non-profit organisations are exempt from paying corporate income tax if they meet the necessary criteria.
Owners of the organisation are protected from personal liability.
Disadvantages of a non-profit organisation
Raising funding for projects can be complicated.
Non-profit organisations can face immense pressure from stakeholders.
The financial spending of the organisation is open to scrutiny from the public.
6. Cooperative
A cooperative is a business structure whose owners are consumers of its services. It is operated to provide benefits to those people. It often aims to pursue economic, social, or cultural goals.
Examples of cooperatives include community-owned stores and farms such as Anglia Farmers or supporter-led sports clubs.
Advantages of cooperatives
They are relatively easy to start.
Management style is democratic, with each member having voting rights.
Funding is internal, hence responsibility is shared among members.
Disadvantages of cooperatives
Independent of the amount invested, all members have equal voting rights.
There is a limit to sharing dividend payments.
There is the risk of rigid business practices.
Over-reliance on internally generated funds.
Factors to consider in choosing a business structure
In choosing a business structure best suited to your business, the following factors should be considered:
1. Start-up finance
The cost of setting up a business increases proportionally to the amount of legal paperwork. One important factor to consider when choosing a business structure is the amount of money you are willing to invest in the initial setup costs.
2. Number of owners
The amount of owners you are willing to involve in the management of your business is also an important factor to consider. Then you can custom-fit your business ownership structure to one of the many available - whether for one or 100 owners.
3. Liabilities
The need to protect your personal assets from debt makes business risk and liability an important consideration. Sole proprietorships and certain types of partnerships face unlimited liability, meaning that the owners are personally liable for any debts the business incurs.
On the other hand, incorporated companies have limited liability, meaning the owners are not personally liable for the company's debt. For owners looking to build a business with limited liability, a limited liability company or a corporation might be best.
4. Business ownership transfer
A sole proprietorship rarely outlives its owner. Considering whether you want your business to keep running after you are gone is also important. If you are looking to pass ownership to your family or children, the kind of business ownership structure you choose will be absolutely crucial.
Business ownership examples
Real-world business ownership examples by type:
- Partnership: "IDEO" is a design and innovation consulting firm that started as a partnership.
- Private Limited Companies: "Atlassian" is a private limited company that provides collaboration, development, and issue-tracking software.
- Public Limited Companies, PLC: "Walmart" is a public limited company that operates a chain of discount department stores.
- Non-for-profit Organisation: "Salvation Army" is a not-for-profit organization that provides social services, including food and shelter, to the homeless.
- Cooperatives: "Ocean Spray" is a cooperative of cranberry farmers that markets and sells cranberry juices and other products.
Now let's take a look at some examples in more detail!
Public Limited Company example
General Motors has a public limited company structure, meaning that its shares can be traded publicly. The company specializes in automobiles, and it is ranked amongst the top ten Fortune 500 companies. It is the parent company to famous brands like Chevrolet, Cadillac, and Opel.
Fig. 3 - An external view of the General Motors building
Partnership example
Red Bull decided to create a partnership with GoPro, as the two lifestyle brands have shared interests. Both brands are about adventure, a fearless approach, and lots of action. Under the terms of the agreement, Red Bull will receive ownership interest in GoPro, and GoPro will become the exclusive supplier of point-of-view imaging technology for Red Bull's media productions and events.
In conclusion, there are six business ownership structures, each with its own advantages and disadvantages. Depending on the type of business you are looking to run, the structure you employ will be a major factor in the success of your business entity.
Business Ownership - Key takeaways
Ownership of a business refers to the legal control over a business. It gives the owner or the legal capacity to dictate the business operations and dealings.
There are six major business ownership structures namely:
- Sole Proprietorships
- Partnerships
- Private limited companies
- Public limited companies
- Non-Profit organisations
- Cooperatives.
- Sole proprietorship, partnership, and limited liability companies are the most common business ownership structures.
Each form of business comes with its own set of advantages and disadvantages.
- Factors to be considered when choosing a business ownership structure are:
- Start-up finance
- Number of owners
- Liabilities
- Business ownership transfer.
References
- Fig. 3 - An external view of the Gemeral Motors building (https://www.wikiwand.com/en/General_Motors_Canada#Media/File:GeneralMotorsCanada3.jpg) by Raysonho (https://commons.wikimedia.org/wiki/User:Raysonho) is licensed by (https://creativecommons.org/publicdomain/zero/1.0/deed.en)
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