The key to choosing the right form of ownership is understanding the characteristics of each form and knowing how they affect an entrepreneur's personal and business circumstances.
Factors to consider include:
- tax implications
- liability expense
- start up and future capital requirements
- managerial ability
- control
- business goals
- management succession plans
- cost of formation
sole proprietorship
A sole proprietorship is a business owned and managed by one individual and is the most popular form of ownership.
Sole proprietorships offer these advantages:
- simple to create
- least costly form to begin
- owner has total decision-making authority
- no special legal restrictions
- easy to discontinue
Sole proprietorships suffer from these disadvantages:
- Unlimited personal liability of owner
- limited managerial skills and capabilities
- limited access to capital
- lack of continuity
partnerships
A partnership is an association of two more people who co-own a business for the purpose of making a profit.
Partnerships offer these advantages:
- easy to establish
- complementary skills of partners
- division of profits
- larger pool of capital available
- ability to attract limited partners
- little government regulation
- flexibility
- tax advantages
partnership suffer from these disadvantages:
- unlimited liability of at least one partner
- difficulty in disposing of partnership interest
- lack of continuity
- potential for personal and authority conflicts
- partners bound by the law of agency
corporations
A limited partnership operates like any other partnership except that it allows limited partners (primary investors who cannot take an active role in managing the business) to become owners without subjecting themselves to unlimited personal liability for the company's debt.
A corporation, the most complex of the three basic forms of ownership, is a separate legal entity. To form a corporation, an entrepreneur or must file the articles of incorporation with the state in which the company will incorporate.
Corporations offer these advantages:
- limited liability of stockholders
- ability to attract capital
- ability to continue indefinitely
- transferable ownership
Corporation suffer from these disadvantages:
- cost and time in incorporating
- double taxation
- potential for diminished managerial incentives
- legal requirements and regulatory red tape
- potential loss of control by the founders
alternate forms of ownership
An S corperation offers its owners omitted liability protection but avoids the double taxation of C corporations.
A limited liability company, like an S corperation, is a cross between a partnership in a corporation. However, it operates with out the restrictions imposed on an S corperation. To create an LLC, an entrepreneur or must file the articles of organization and the operating agreement with the secretary of state.
A joint venture is like a partnership, except that it is formed for specific purpose.
Much like a joint venture, a syndicate is a private investment group formed for the purpose of a large commercial project whose scope is larger than the capacity of an investor to finance alone.
