As an entrepreneur, the nature of your company determines the type of business ownership you will register.
In this article, we will look at five types of business ownership so that you can make an informed decision about which style aligns with your goals and vision based on their advantages and disadvantages.
Suppose you recognize a need in the market for your product or service and want to establish, run, and reap the fruits of your efforts. In that case, this type of ownership is most appropriate because a single person has found it and corporate law recognizes that person and company as an entity. An example of this is your local grocery and clothing store. Freelancers and consultants also qualify under this category.
Professional – This type of organization is easy to set up. As an owner, you have complete control over your business and you get all the profits.
Cons – If you underestimate some risk or make a wrong business decision, you are personally responsible for any and all losses. Also, if your business develops to a stage where you want to partner with another person, then you need to dissolve the company and establish a proprietary limited company (Pty Ltd).
Suppose you share a common vision with someone and you both strongly believe in the success of the business plan. In that case, this type of ownership allows two or more individuals or organizations to raise money for their financing. Business to achieve a shared goal. In addition to registering and submitting the annual report, you will need a formal agreement that records how the activities are to be carried out and how you want to share the profits and losses. Examples of such arrangements are brands approved by celebrities. Such as the partnership between Adidas and Kanye West, where award-winning hip-hop artists with Adidas’ streetwear segment creation platform are driving their revenue growth.
Another example of a mutually beneficial business relationship is the partnership between Starbucks and Spotify, where users play music from the audio streaming service to create an environment in the branches of multinational coffee houses. At the same time, their patrons can enjoy a cup of their premium drink. Also, customers can create playlists themselves through the Starbucks app, where musicians also get exposure through the platform.
Within this ownership type, there are different models such as:
General: Businesses registered in this section do not have to be formed through the state and the partners have independent powers when signing the contract and applying for the loan. However, each person or entity has full responsibility and is personally responsible for all business debts and legal obligations.
Ltd.: The state must approve such partnerships, and at least one partner is solely responsible for running the business. Other partners can fund the company but don’t have to manage it like investors.
Limited liability: In this case, all partners are active in running the business and are responsible for all of the debt and legal obligations, but not to the fault and exclusion of fellow partners. However, not all states approve of this model, which is limited to certain professions, such as lawyers and accountants.
Professional – Two (or more) minds are better than one in owning this type of business, where combined knowledge and the power of experience can limit potential problems and track the growth of the company faster. The owners have more cash to run the company as they share business expenses.
Cons – This divided responsibility, however, means that business decisions need to be consensual because sharing control means sharing responsibility.
3. Limited Liability Company (LLC)
Not to be confused with the ‘Limited Liability Partnership (LLP)’ described above, in an LLC, there are financial barriers between the owner and the company. In other words, business creditors cannot go after the owners’ personal assets, and if the company goes into debt or bankruptcy, there is no risk of your personal assets being forfeited.
Professional – The advantage of an LLC is that the personal assets of the owners are protected. Also, they do not have to pay extra taxes because the state considers this type of business as self-employment.
Cons – One drawback, however, is higher start-up costs and self-employment taxes.
There are also different types of corporate ownership such as:
C Corporation: In this example, the business is its own entity, separate from its owners, where individuals, for example, buy shares of the company while the law protects their personal assets. Publicly traded companies like Microsoft or Apple follow this business model.
B Corporation: Although this type of ownership benefits the public, it does so for profit. An example of this is Oliberté, a premium leather goods company that “dedicates and builds its materials sustainably from Africa to create a way out of poverty.”
Close the corporation: Members operate and operate such models and, like an LLC, they benefit from liability protection. Examples of this corporation style include Deloitte and PricewaterhouseCoopers (PwC.)
Non-profit: This type of business ownership exists for the common good, so it is not liable for taxes. However, the owners must reinvest the money returned to the company. Charities and religious organizations are examples of close corporations, such as scientific institutions.
Professional – Since business development and advances of this nature encourage the advancement of technology and benefit society, they have access to better financing.
Cons – Corporations, however, still have to pay income tax.
The last type of ownership we will look at in this article is cooperatives. This business segment is private because it is owned by individuals who use products and services such as agriculture, insurance, financial services, housing and utilities. Examples of effective models are Affiliated Foods Inc., Associated Grocers, CoBank, Farm Credit Bank, 21st Street Co-op – Student Housing Cooperative in Austin, Texas – and National Rural Utilities Cooperative Finance Corporation.
Professional – Like partnerships, costs are divided between owners.
Cons – Since many stakeholders are involved in cooperative management, its members have lost control.
This article looks at the different types of business ownership and how the decision will be made depends on the skills required to run the business, whether you want complete control over the management and your risk tolerance. We have also seen examples of cases for and against each and every one of them.
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