of Business Ownership
One of the first
decisions that you will have to make as a business owner is how the company
should be structured. Consult with an accountant and a lawyer to help
you select the form of ownership that is right for you.
In making a choice,
you will want to take into account the following:
- Your vision regarding the
size and nature of your business.
- The business's vulnerability
- Tax implications of the
different ownership structures.
- Whether or not you need
to re-invest earnings into the business.
- Expansion of the business.
- Sale of the business.
The vast majority of small businesses start out as sole proprietorships.
Sole proprietors own all the assets of the business and the profits generated
by it. They also assume complete responsibility for any of its liabilities
or debts. In the eyes of the law and the public, you are one in the same
with the business.
Advantages of a Sole Proprietorship
- Easiest and least expensive
form of ownership to organize.
- Sole proprietors are in
complete control, and within the parameters of the law, may make decisions
as they see fit.
- Sole proprietors receive
all income generated by the business to keep or reinvest.
- Profits from the business
flow-through directly to the owner's personal tax return. The business
is easy to dissolve, if desired.
Disadvantages of a Sole
- Sole proprietors have
unlimited liability and are legally responsible for all debts against
- Their business and personal
assets are at risk.
- May be at a disadvantage
in raising funds and are often limited to using funds from personal
savings or consumer loans.
- May have a hard time attracting
high calibre employees, or those that are motivated by the opportunity
to own a part of the business.
In a Partnership, two or more
people share ownership of a single business. Like proprietorships, the
law does not distinguish between the business and its owners.
The Partners should have a
legal agreement that sets forth how decisions will be made, profits will
be shared, disputes will be resolved, how future partners will be admitted
to the partnership, how partners can be bought out, or what steps will
be taken to dissolve the partnership when needed. The partners must also
decide how much time and capital each will contribute.
Advantages of a Partnership
- Partnerships are relatively
easy to establish; however time should be invested in developing the
- Different partners bring
different skills to the enterprise.
- With more than one owner,
the ability to raise funds may be increased.
- The profits from the business
flow directly through to the partners' personal tax returns.
- Prospective employees
may be attracted to the business if given the incentive to become
Disadvantages of a Partnership
- Partners are jointly and
individually liable for the actions of the other partners.
- Profits must be shared
- Since decisions are shared,
disagreements can occur.
- The partnership may have
a limited life; it may end upon the withdrawal or death of a partner.
A corporation is considered
by law to be a legal entity or a "person", separate and apart
from those who own it. A corporation can be taxed; it can be sued; it
can enter into contractual agreements. The owners of a corporation are
its shareholders. The shareholders elect a board of directors to oversee
the major policies and decisions. The corporation has a life of its own
and does not dissolve when ownership changes.
Benefits of Incorporating