When you want to start up a new business, one of the first thing to consider is the business ownership form. It is crucial to understand that the form of business ownership has far-reaching implications for the business and its owners- from the taxes the company pays and how it raises money to the owner’s liability for the company’s debts and his or her ability to transfer the business to the next generation. There are generally basically four forms of business ownership: sole proprietorship, partner, corporation and joint venture. However, it is important to know that There is no single “best” form of business ownership. Each form has its own unique set of advantages and disadvantages. The key to choosing the right form of ownership is to understand the characteristics of each business entity and to know how they affect an entrepreneur’s business and personal circumstances.
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Things to Consider for business ownership form
When considering which form of business ownership is suitable for you, you need to take into the following factors into consideration.
Business liability issue. Some forms of ownership offer business owners greater protection from personal liability from financial problems, faulty products, and lawsuits. Business owners must evaluate the potential for legal and financial liabilities and decide the extent to which they are willing to assume personal responsibility for their companies’ obligations.
Capital sourcing issue. The form of ownership can affect an business ability to raise start-up capital. Some forms of ownership are better than others when obtaining start-up capital, depending on bow much capital is needed and the source from which it is to be obtained. As a business grows, capital requirements increase, and some forms of ownership make it easier to attract outside financing.
Business control issue. Some forms of ownership require an business owner to share the control with others over the management of the company. Before selecting a business entity, entrepreneurs must decide how much control they are willing to sacrifice in exchange for resources from others.
The Sole Proprietorship Business Form
The sole proprietorship is the simplest and most popular form of ownership. This form of business ownership is designed for a business owned and managed by one individual. The sole proprietor is the only owner and ultimate decision maker for the business. One of the key advantages of the sole proprietorship is it simplicity and easy to control. The business owner makes its own decision and all the profits are allocated to the business owner. The disadvantage of the business form is that the business owners will bear the unlimited personal liability of the business; the sole proprietor is personally liable for all business debt. In addition, if the business grows and expands, a sole proprietor often needs additional financial resources, it may be difficult for sole proprietors to borrow additional funds.
The Partnership Business Form
A partnership business form is an association of two or more people who co-own a business for the purpose of making a profit. In a partnership, the co-owners (partners) legally share a business’s assets, liabilities, and profits according to the terms of an established partnership agreement. One of the key advantages of the partnership is that you can your partner may complement each other on the skills and knowledge. Another advantage of the business partnership is the large pool of capital. A partnership can significantly broaden the pool of capital available to a business. Each partner’s asset base supports a larger borrowing capacity than either partner would have had alone. One of the disadvantage of the partnership is that conflicts between the partners about the business future development, strategies etc.
There are variations to the partnership form. One is the limited partnership. A limited partnership is a modification of a general partnership. Limited partnerships are composed of at least one general partner and at least one limited partner. The general partner is treated, under law, in the same manner as in a general partnership, which means that he or she has unlimited personal liability for the partnership’s debts. Limited partners are treated as investors in the business venture with limited liability and therefore can lose only the amount they have invested in the business. There is no limit on the number of limited partners in a limited partnership.
Business Corporation Form
The corporation is the most complex of the three major forms of business ownership. The life of the corporation is independent of its owners, and shareholders can transfer their ownership in the business to others. One of the key advantage of the business corporation is that Corporations have the power to raise capital by selling shares of ownership to outside investors. Another advantage of the business corporation is that it allows investors to limit their liability to the total amount of their investment. The key disadvantage of the business corporation form is that it Corporations can be costly and time consuming to establish. As the business grows and expands, the original business owner may lost control of the business.