Owning a business can be a complicated and long journey.
Especially when you get stuck at the first hurdle: knowing the different types of business ownership and picking the right one for you!
Here, I'll provide you with all the information you need to set your startup up for success, picking the right business ownership type for your specific needs.
Short on time? Here are the key takeaways
- Sole proprietorship: A single owner controls the business and is personally responsible for all debts and liabilities.
- Partnership: Two or more individuals share ownership, profits, and liabilities based on their agreement.
- Private limited company (LTD): A legally separate entity from its owners, offering limited liability and restricting share transfers.
- Non-profit: An organization that reinvests profits into its mission rather than distributing them to owners or shareholders.
What is Business Ownership?
First off, before I dive into the different types of business ownership structures, let's quickly touch on what I mean by the term ‘business ownership.'
In simple terms, business ownership covers the legal control and structure of a business, identifying who owns the brand, what percentage they own, and the legal structure they must adhere to.
For many founders, that can seem quite confusing (if not rather boring as well!), but it is something you should be aware of, as each type of business ownership comes with its own pros and cons.
Types of Business Ownership Structures
Sole proprietorship
A sole proprietorship is one of the most commonly chosen options, mainly due to how simple it is to set up. For those working as solo entrepreneurs, this option is a good one as everything is owned by one person.
The main advantages of a sole proprietorship are that all the income and business assets are owned by the individual, you don't have to worry about corporation tax, and you get to make all the decisions.
On the flip side, it also means that you are completely responsible for all business debt or losses, and there is very little to differentiate between business and personal income, which can cause problems when it comes to paying taxes at the end of the year.
Partnership
Another business ownership option you may want to consider is a partnership, which can come in two different forms: a general partnership or a limited liability partnership.
For a general partnership, all partners are responsible for making joint decisions and handling finances, whereas an LLP protects each partner against the potential debt of another partner.
This is a much clearer way to share profits and division-making compared to a sole trader, but it does mean you can be held liable for the actions of your partners on behalf of the business.
Private limited company (LTD)
Private limited companies are incorporated businesses that are owned and controlled privately. The ownership of an LTD is split by shares in the brand, allowing multiple people to own a part of the business.
One of the biggest advantages of choosing a private limited company is that it offers owners limited liability, keeping their personal assets protected from any liabilities the business incurs, which means no more sleepless nights worrying about your mortgage!
The other benefit of an LTD is that it can continue to exist after the death of any owner, making it the best option for passing the business on to a family member or friend.
Unfortunately, it is more expensive to set up an LTD due to legal and administrative costs, and you also need to factor in other aspects, such as corporation tax, but it's a small price to pay for the security of the business and your finances.
Non-Profit
Lastly, in specific instances, you could set up a non-profit organization, so long as you have set up your business for purposes other than profit.
In this instance, any profits the business makes don't go to you as an owner but instead go to the cause you set it up for.
Aspects to Consider When Picking a Business Structure
With all that in mind, here are a few important aspects to consider when choosing the right business structure for you. While each business ownership type has its pros and cons, choosing the right one for you will depend entirely on your specific situation.
Start-up finance
As a founder, keeping on top of your budget is absolutely crucial. After all, regardless of how you're funding your business, you need to ensure you are maximizing your money, and setting up a business can be quite expensive, depending on which business structure you choose.
Liabilities
One of the major issues with sole proprietorships and partnerships is the unlimited liability, which can cause some anxious entrepreneurs several sleepless nights. For many owners, they would rather not be liable for any debts that their business incurs, and for good reason!
If you opt for a limited liability company or a corporation, you can build your brand with limited liability, although there are other caveats to consider, such as corporation tax.
How many owners are there?
Are you starting your entrepreneurial venture alone or with a group of like-minded individuals? The number of owners you have as part of your structure will also be a major factor in which structure you choose. You don't want to set up as a sole proprietor on paper, with a verbal agreement to share ownership, only to end up having some difficult conversations down the line.
Transferring the business ownership
The last thing to consider is how long you plan to own your business. After all, sole proprietorship businesses rely heavily on the owner and rarely outlive them.
Is it important to you that the business continues running after you've finished with it? If you want to pass it on to family or friends, it's important you choose an ownership that makes that easy and seamless.
Final Thoughts
Choosing the right business entity can feel overwhelming, but understanding your options can make all the difference in your success. From sole proprietorships to corporations, the structure you choose will impact everything from liability to taxes and decision-making power.
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