Question

What are the various forms of business ownership? What are the pros and cons of each? Which one is most applicable to your country and/or product?

Answer 1

Answer:

There are four major forms of business ownership:

· Sole proprietorship

· Partnership

· Corporation

· Limited liability company or LLC

Sole proprietorship

It is the most common and simplest form of business ownership, in this type of ownership the business is owned and run by someone for their own benefit. The existence of the business solely depends on the owner’s decisions, so when the owner dies, the busines dies.

Pros

• All profits are subject to the owner
• There is very little regulation for proprietorships
• Owners have total flexibility when running the business
• Very few requirements for starting—often only a business license

Cons

• Owner is 100% responsible for business debts
• Equity is completely limited to the owner’s personal resources
• Ownership of proprietorship is difficult to transfer
• No distinction between personal and business income

Partnership

These are of two types: general and limited. In general partnerships, money, property, labor, etc. is invested by both the owners, to the business and are both 100% liable for business debts. In other words, even if you invest a little into a general partnership, you are still potentially responsible for all its debt. General partnerships do not require a formal agreement—partnerships can be verbal or even implied between the two business owners.

Limited partnerships require a formal agreement between the partners. They must also file a certificate of partnership with the state. Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership or investment.

Pros

• Shared resources provide more capital for the business
• Each partner shares the total profits of the company
• Similar flexibility and simple design of a proprietorship
• Inexpensive to establish a business partnership, formal or informal

Cons

• Partnership ends when any partner decides to end it
• Each partner is 100% responsible for debts and losses
• Selling the business is difficult—requires finding new partner

Corporation

Corporations are, for tax purposes, separate entities and are considered a legal person. This means, among other things, that the profits generated by a corporation are taxed as the “personal income” of the company. Then, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners.

Pros

• Can be transferred to new owners fairly easily
• Personal assets cannot be seized to pay for business debts
• Limits liability of the owner to debts or losses
• Profits and losses belong to the corporation

Cons

• Establishing a corporation is costly
• With some exceptions, corporate income is taxed twice
• Corporate operations are costly
• Start a corporate business requires complex paperwork

Limited Liability Corporation

The advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each. Similar to a limited partnership, an LLC provides owners with limited liability while providing some of the income advantages of a partnership.

Pros

• The profits of the LLC are shared by the owners without double-taxation
• Limits liability to the company owners for debts or losses

Cons

• Beginning an LLC has high costs due to legal and filing fees
• Ownership is limited by certain state laws
• Agreements must be comprehensive and complex

The most applicable in my country (India) are Sole proprietorship, partnership firms and Limited Liability Corporation.