What is a Form of Ownership Business Plan?

A single person owns and runs a sole proprietorship, and this sole proprietor has the rights to profits and assets of the business. 3 min read updated on February 01, 2023

Many small businesses begin as sole proprietorships. A single person owns and runs a sole proprietorship, and this sole proprietor has the rights to profits and assets of the business. Debts and liabilities are also the responsibility of the owner. Sole proprietorships are a great way to begin a business since they require very little money.

When you own a business , you are only taxed once. A sole proprietorship is not taxed as much as other business types. One person is the owner, so disagreements with other owners don't happen. It's also easy to end this type of business.

Sole Proprietorship Advantages

There are many advantages to having a sole proprietorship. For example:

  • This type of business costs the least and is simple to begin.
  • The sole proprietor has total control over the business and can make decisions that are best for the enterprise.
  • The sole proprietor owns all the income from the business and can reinvest or retain it.
  • The money that the business makes goes directly to the owner's personal tax return.
  • It's easy to end the business.

Sole Proprietorship Disadvantages

Disadvantages to having a sole proprietorship include:

  • Any debts that form are the responsibility of the sole proprietor. All personal and business assets are at risk.
  • They can only use money from consumer loans or personal funds to advance the business.
  • It might be difficult to attract high-quality employees.
  • Not all employee benefits are available in a sole proprietorship.

Sole Proprietorship tax forms are:

  • Schedule SE: Self-employment tax
  • Form 1040: Individual Income Tax Return
  • Employment Tax Forms
  • Schedule C: Profit or Loss from Business (also called Schedule C-EZ)
  • Form 8829: Expenses for Business Use of Your Home
  • Form 1040-ES: Estimated Tax for Individuals
  • Form 4562: Depreciation and Amortization

To run a business of this type takes a special kind of person who can handle all the ins and outs of owning a business . The sole proprietor is completely responsible for all business decisions and raising money. Certain employee benefits cannot be completely deducted from the business's income. Sole proprietors need to be aware that some of the costs can be partially deducted later on taxes as an adjustment.

Partnerships

Another form of business ownership is a partnership. Two or more people can share the ownership of a business in a partnership. The law does not set apart partners and owners, just like proprietorships. With a partnership, there should be some kind of agreement so that both parties know what they are responsible for, as well as what each gets if the business were to end. The legal agreement should include who will make decisions, how profits will be distributed, how disagreements will be handled, how partners in the future will enter the business, and what the process is for partners being bought out.

Partners need to figure out how much each will spend on the business and the amount of time they will spend on the business. Partnerships can be formed with other individuals and businesses. It does not cost much to form a partnership, although tax and liability rules are different for partnerships. Think very carefully who to partner up with, since the entire company can be jeopardized if one partner makes a legal or financial mistake.

Partnership Advantages

Partnership advantages include:

  • Partnerships are simple to start but take time to properly grow.
  • The likelihood of successfully raising funds increases with partners.
  • The money made from the business goes directly to the personal tax returns of all partners.
  • Potential employees might be more interested in the business if they know they can become a partner in the future.
  • Partners who have compatible skills can help a business grow.

Partnership Disadvantages

Partnership disadvantages include:

  • Partners are responsible for each other.
  • Partners must equally share all profits.
  • Disagreements are likely because decisions are made together.
  • Employee benefits are not all deductible on business-related tax returns
  • The partnership is not guaranteed to last due to one of the partners leaving or dying.

There are several kinds of partnerships that can be chosen. One is a general partnership where everything is divided, which includes responsibility of management and reliability and loss or profit shared, unless otherwise noted in the initial agreement.

If you need help with a form of ownership business plan, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

  • What Is the Most Common Type of Partnership?
  • Difference Between Sole Proprietorship and Partnership
  • Advantages and Disadvantages of Sole Proprietorship
  • What is a Sole Proprietorship
  • Sole Proprietorship vs Partnership
  • Partnership Advantages and Disadvantages
  • Define the Term Business Ownership: What You Need to Know
  • Can Sole Proprietorship Have 2 Owners: What You Need to Know
  • Proprietor Check
  • Different Types of Companies and Their Advantages

How to write the structure and ownership section of your business plan?

structure and ownership in a business: different types of liabilities that a business may incur

Business planning is vital to the success of any entrepreneur because it helps them secure funding and find competent business partners. The document itself contains a variety of key sections, including the presentation of the legal structure and ownership of the business.

This section details the legal structure of your business and helps interested parties such as lenders and investors understand who they will be doing business with if they decide to go ahead and finance your company.

In this guide, we’ll look at the objective of the structure and ownership section, deepdive into the information you should include, and cover the ideal length. We’ll also assess the tools that can help you write your business plan.

Ready? Let’s get started!

In this guide:

What is the objective of the structure and ownership section of your business plan?

What information should i include when presenting the legal structure and ownership of my company in my business plan.

  • How long should the structure and ownership section of your business plan be?
  • Example of structure and ownership in a business plan

What tools should I use to write my business plan?

The objective of this section is to provide potential investors, lenders, and strategic partners with a clear and transparent view of your business's legal form, ownership distribution, and registration details. 

It aims to build credibility and trust by showcasing your commitment to openness and compliance with regulations. Let's take a look at some of the key objectives:

Communicate the legal form and registration details

  • You should explicitly state your business's legal form. For example, your business might be corporation, sole proprietorship, or limited liability company (LLC). 
  • Clearly explaining your chosen legal form helps stakeholders understand your entity's liability, taxation, and management implications.
  • It is also essential to disclose where your company is registered. This information is vital as it provides clarity on the jurisdiction under which your business operates. 
  • It also helps investors and lenders assess any legal and regulatory implications specific to the location of registration.

Identify shareholders

  • Potential investors and lenders need to know who owns the company and the percentage of ownership each party holds. 
  • By providing this information, you instill confidence in your business and help identify what needs to be verified as part of Know Your Customer (KYC) and Anti-Money Laundering (ALM) checks down the line.

Transparency is the cornerstone of credibility for businesses. By openly presenting the legal structure and ownership, you signal to potential investors that your business operates with integrity and adherence to regulations. 

Notably, anti-money laundering regulations require investors to verify the identity of all shareholders before committing funds. By providing a clear picture of the parties involved, you can facilitate this process and build trust with investors.

Venture capitalists (VC) firms and angel investors in particular, may have specific criteria such as location and ownership mandates governing the companies they can finance. Being transparent about your company's structure and ownership enables potential investors to assess whether your business aligns with their investment preferences and requirements.

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The structure and ownership subsection arrives quite early in your business plan as it is the first part of the company section which is the second section of the document (after the executive summary) if you are following a standard business plan outline .

At this stage, the reader is still in the process of getting familiar with your business, and this section serves as a crucial foundation for potential investors and partners and helps them understand the core aspects of your business’s structure.

Here's what you should include:

Company registration details and registered office address

Provide information about when and where your company was registered and its registration number. This enables readers to understand the jurisdiction under which your business is operating and helps verify its legal existence.

Also, mention the registration date to showcase the company's longevity or recent establishment.

Include the registered office address of your company. This is the official address where the company can be contacted, and legal notices can be served. Providing this address demonstrates your commitment to compliance and transparency.

The information above needs to repeated for each subsidiary or joint venture owned by your business in order to provide a clear map of the coporate structure.

Overview of ownership

Offer a concise overview of the ownership structure of the company. Identify the shareholders, and specify their ownership percentages or shares. 

If there are numerous shareholders, list individuals or entities owning 5% or more, and highlight those with a controlling interest in the company or on the board.

If the business is controlled by another business, such as a holding company for example, it is also useful to explain who controls that business as well.

Roles and responsibilities of shareholders

In case of multiple shareholders, explain their respective roles and responsibilities within the organization. 

Differentiate between passive investors, board members, and executive or non-executive directors. 

Shareholders' agreement (if applicable)

If the business plan is presented for investment purposes, it is useful to clarify if a shareholders' agreement is in place between the existing investors. 

This agreement outlines the rights and obligations of shareholders and adds an extra layer of legal protection for investors and shareholders.

Expertise of co-shareholders

Highlight any shareholders who contribute more than just financial capital to the company. 

If, for instance, a shareholder is an industry expert and brings valuable advice, contacts, and credibility, emphasize this aspect. 

Doing so demonstrates the added value these shareholders bring to the business.

Group or franchise structure

If your company operates as part of a group or franchise, provide this information for each individual company receiving funds. 

Clarify the relationship between the main company and the individual entities within the group and their respective legal structures.

Addressing geographical restrictions

If some investors have geographical restrictions on their investments, clearly indicate whether your company meets their eligibility criteria. 

This helps investors quickly assess whether your business aligns with their investment mandates or not.

shareholders at a general meeting discussing about their business and future planning

How long should the structure and ownership section of your business plan be? 

The length of your business plan's structure and ownership section requires a delicate balance. 

While a general rule of thumb suggests that it should be about 2 to 3 paragraphs, the actual length depends on several factors, including the complexity of your corporate structure and the number of shareholders involved.

The complexity of your corporate structure 

  • A concise presentation may be sufficient if your company's legal structure is relatively straightforward, with a single owner or a small number of co-founders. 
  • In such cases, aim to provide the necessary information without overwhelming the reader with unnecessary details. A paragraph or two may convey the key points effectively, ensuring clarity and brevity. 
  • However, if you have a complex business structure, aim to provide details about members who play a key role in business continuity and profitability. 

The number of shareholders involved

  • If your business involves multiple shareholders, each with significant ownership percentages or unique roles, you may need to dedicate more space to this section. 
  • Do this by providing a comprehensive breakdown of ownership distribution and outlining each shareholder's contributions. 
  • This may take up more space as you need to add additional information. However, if you have a pretty straightforward ownership structure, a paragraph or two will be sufficient enough.

Regardless of the complexity, striking the right balance between providing sufficient detail and avoiding excessive technical jargon is crucial. The structure and ownership section should be reader-friendly, allowing potential investors and stakeholders to understand the core aspects of your company without feeling overwhelmed by intricate legalities.

Repetition can dilute the impact of your message and unnecessarily lengthen the section. Ensure that you don't reiterate information that has already been covered in other parts of the business plan. Instead, focus on providing unique insights and details that enhance the reader's understanding of your corporate structure and ownership.

When crafting this section, prioritize the most critical points that investors or partners need to know about your company's structure and ownership. 

Focus on aspects that directly impact decision-making, such as the majority shareholder's influence, board composition, different classes of shares in issue, or any unique arrangements that set your business apart.

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The Business Plan Shop has dozens of business plan templates that you can use to get a clear idea of what a complete business plan looks like.

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Example of structure and ownership section in a business plan 

Below is an example of what the structure and ownership section of your business plan might look like. As you can see, it is part of the overall company section and precedes the location and management team subsections.

The structure and ownership section of a business plan provides a detailed overview of how your company is organized and who holds ownership stakes in the business.

structure and ownership section: The Business Plan Shop's online software

This example was taken from one of  our business plan templates .

In this section, we will review three solutions for creating a business plan for your business: using Word and Excel, hiring a consultant to write the business plan, and utilizing an online business plan software.

Create your business plan using Word and Excel

This is the old-fashioned way of creating a business plan (1990s style) and using Word and Excel has both pros and cons.

On the one hand, using either of these two programs is cheap and they are widely available. 

However, creating an error-free financial forecast with Excel is only possible if you have expertise in accounting and financial modeling.

Because of that investors and lenders might not trust the accuracy of your forecast unless you have a degree in finance or accounting.

Also, writing a business plan using Word means starting from scratch and formatting the document yourself once written - a process that can be quite tedious - especially when the numbers change and you need to manually update all the tables and text.

Ultimately, it's up to the business owner to decide which program is right for them and whether they have the expertise or resources needed to make Excel work. 

Hire a consultant to write your business plan

Outsourcing your business plan to a consultant can be a viable option, but it also presents certain drawbacks. 

On the plus side, consultants are experienced in writing business plans and adept at creating financial forecasts without errors. Furthermore, hiring a consultant can save you time and allow you to focus on the day-to-day operations of your business.

However, hiring consultants is expensive: budget at least £1.5k ($2.0k) for a complete business plan, more if you need to make changes after the initial version (which happens frequently after the first meetings with lenders).

For these reasons, outsourcing the plan to a consultant or accountant should be considered carefully, weighing both the advantages and disadvantages of hiring outside help.

Ultimately, it may be the right decision for some businesses, while others may find it beneficial to write their own business plan using an online software.

Use an online business plan software for your business plan

Another alternative is to use online business plan software .

There are several advantages to using specialized software:

  • You are guided through the writing process by detailed instructions and examples for each part of the plan
  • You can be inspired by already written business plan templates
  • You can easily make your financial forecast by letting the software take care of the financial calculations for you without errors
  • You get a professional document, formatted and ready to be sent to your bank
  • The software will enable you to easily track your actual financial performance against your forecast and update your forecast as time goes by

If you're interested in using this type of solution, you can try our software for free by signing up here .

To sum it up, a well-written structure and ownership subsection is key to ensuring that the reader is clear on who controls the business, and whether or not it fits their investment criterias.

Also on The Business Plan Shop

  • How to do a market analysis for a business plan
  • How to present your management team in your business plan?
  • Where to write the conclusion of your business plan?

Know someone who needs help writing-up their business plan? Share this article with them and help them out!

Guillaume Le Brouster

Founder & CEO at The Business Plan Shop Ltd

Guillaume Le Brouster is a seasoned entrepreneur and financier.

Guillaume has been an entrepreneur for more than a decade and has first-hand experience of starting, running, and growing a successful business.

Prior to being a business owner, Guillaume worked in investment banking and private equity, where he spent most of his time creating complex financial forecasts, writing business plans, and analysing financial statements to make financing and investment decisions.

Guillaume holds a Master's Degree in Finance from ESCP Business School and a Bachelor of Science in Business & Management from Paris Dauphine University.

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Business LibreTexts

6: Forms of Business Ownership

  • Last updated
  • Save as PDF
  • Page ID 18196

  • Stephen Skripak et al.
  • Virginia Tech via Virginia Tech Libraries' Open Education Initiative

Learning Objectives

  • Identify the questions to ask in choosing the appropriate form of ownership for a business.
  • Describe the sole proprietorship and partnership forms of organization, and specify the advantages and disadvantages.
  • Identify the different types of partnerships, and explain the importance of a partnership agreement.
  • Explain how corporations are formed and how they operate.
  • Discuss the advantages and disadvantages of the corporate form of ownership.
  • Examine special types of business ownership, including limited-liability companies, and not-for-profit corporations.
  • Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies.

The Ice Cream Men

Who would have thought it? Two ex-hippies with strong interests in social activism would end up starting one of the best-known ice cream companies in the country—Ben & Jerry’s. Perhaps it was meant to be. Ben Cohen (the “Ben” of Ben & Jerry’s) always had a fascination with ice cream. As a child, he made his own mixtures by smashing his favorite cookies and candies into his ice cream. But it wasn’t until his senior year in high school that he became an official “ice cream man,” happily driving his truck through neighborhoods filled with kids eager to buy his ice cream pops. After high school, Ben tried college but it wasn’t for him. He attended Colgate University for a year and a half before he dropped out to return to his real love: being an ice cream man. He tried college again—this time at Skidmore, where he studied pottery and jewelry making—but, in spite of his selection of courses, still didn’t like it.

Figure-6.1-Ben-and-Jerry-300x199.jpg

In the meantime, Jerry Greenfield (the “Jerry” of Ben & Jerry’s) was following a similar path. He majored in pre-med at Oberlin College in the hopes of one day becoming a doctor. But he had to give up on this goal when he was not accepted into medical school. On a positive note, though, his college education steered him into a more lucrative field: the world of ice cream making. He got his first peek at the ice cream industry when he worked as a scooper in the student cafeteria at Oberlin. So, fourteen years after they first met on the junior high school track team, Ben and Jerry reunited and decided to go into ice cream making big time. They moved to Burlington, Vermont—a college town in need of an ice cream parlor—and completed a $5 correspondence course from Penn State on making ice cream. After getting an A in the course—not surprising, given that the tests were open book—they took the plunge: with their life savings of $8,000 and $4,000 of borrowed funds they set up an ice cream shop in a made-over gas station on a busy street corner in Burlington. 1 The next big decision was which form of business ownership was best for them. This chapter introduces you to their options.

Factors to Consider

If you’re starting a new business, you have to decide which legal form of ownership is best for you and your business. Do you want to own the business yourself and operate as a sole proprietorship? Or, do you want to share ownership, operating as a partnership or a corporation? Before we discuss the pros and cons of these three types of ownership, let’s address some of the questions that you’d probably ask yourself in choosing the appropriate legal form for your business.

  • In setting up your business, do you want to minimize the costs of getting started? Do you hope to avoid complex government regulations and reporting requirements?
  • How much control would you like? How much responsibility for running the business are you willing to share? What about sharing the profits?
  • Do you want to avoid special taxes?
  • Do you have all the skills needed to run the business?
  • Are you likely to get along with your co-owners over an extended period of time?
  • Is it important to you that the business survive you?
  • What are your financing needs and how do you plan to finance your company?
  • How much personal exposure to liability are you willing to accept? Do you feel uneasy about accepting personal liability for the actions of fellow owners?

No single form of ownership will give you everything you desire. You’ll have to make some trade-offs. Because each option has both advantages and disadvantages, your job is to decide which one offers the features that are most important to you. In the following sections we’ll compare three ownership options (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and its Advantages

In a sole proprietorship , as the owner, you have complete control over your business. You make all important decisions and are generally responsible for all day-to-day activities. In exchange for assuming all this responsibility, you get all the income earned by the business. Profits earned are taxed as personal income, so you don’t have to pay any special federal and state income taxes.

Disadvantages of Sole Proprietorships

For many people, however, the sole proprietorship is not suitable. The flip side of enjoying complete control is having to supply all the different talents that may be necessary to make the business a success. And when you’re gone, the business dissolves. You also have to rely on your own resources for financing: in effect, you are the business and any money borrowed by the business is loaned to you personally. Even more important, the sole proprietor bears unlimited liability for any losses incurred by the business. The principle of unlimited personal liability means that if the business incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable. As a sole proprietor, you put your personal assets (your bank account, your car, maybe even your home) at risk for the sake of your business. You can lessen your risk with insurance, yet your liability exposure can still be substantial. Given that Ben and Jerry decided to start their ice cream business together (and therefore the business was not owned by only one person), they could not set their company up as a sole proprietorship.

Partnership

A partnership (or general partnership) is a business owned jointly by two or more people. About 10 percent of U.S. businesses are partnerships 2 and though the vast majority are small, some are quite large. For example, the big four public accounting firms are partnerships. Setting up a partnership is more complex than setting up a sole proprietorship, but it’s still relatively easy and inexpensive. The cost varies according to size and complexity. It’s possible to form a simple partnership without the help of a lawyer or an accountant, though it’s usually a good idea to get professional advice.

Professionals can help you identify and resolve issues that may later create disputes among partners.

The Partnership Agreement

The impact of disputes can be lessened if the partners have executed a well-planned partnership agreement that specifies everyone’s rights and responsibilities. The agreement might provide such details as the following:

  • Amount of cash and other contributions to be made by each partner
  • Division of partnership income (or loss)
  • Partner responsibilities—who does what
  • Conditions under which a partner can sell an interest in the company
  • Conditions for dissolving the partnership
  • Conditions for settling disputes

Unlimited Liability and the Partnership

A major problem with partnerships, as with sole proprietorships, is unlimited liability : in this case, each partner is personally liable not only for his or her own actions but also for the actions of all the partners. If your partner in an architectural firm makes a mistake that causes a structure to collapse, the loss your business incurs impacts you just as much as it would him or her. And here’s the really bad news: if the business doesn’t have the cash or other assets to cover losses, you can be personally sued for the amount owed. In other words, the party who suffered a loss because of the error can sue you for your personal assets. Many people are understandably reluctant to enter into partnerships because of unlimited liability. Certain forms of businesses allow owners to limit their liability. These include limited partnerships and corporations .

Limited Partnerships

The law permits business owners to form a limited partnership which has two types of partners: a single general partner who runs the business and is responsible for its liabilities, and any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.

Advantages and Disadvantages of Partnerships

The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business. Second, it makes financing easier: the business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Finally, continuity needn’t be an issue because partners can agree legally to allow the partnership to survive if one or more partners die.

Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Second, being a partner means that you have to share decision making, and many people aren’t comfortable with that situation. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of jeopardizing the continuance of the business. Third, in addition to sharing ideas, partners also share profits. This arrangement can work as long as all partners feel that they’re being rewarded according to their efforts and accomplishments, but that isn’t always the case. While the partnership form of ownership is viewed negatively by some, it was particularly appealing to Ben Cohen and Jerry Greenfield. Starting their ice cream business as a partnership was inexpensive and let them combine their limited financial resources and use their diverse skills and talents. As friends they trusted each other and welcomed shared decision making and profit sharing. They were also not reluctant to be held personally liable for each other’s actions.

Corporation

A corporation (sometimes called a regular or C-corporation) differs from a sole proprietorship and a partnership because it’s a legal entity that is entirely separate from the parties who own it. It can enter into binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and be taxed. Once businesses reach any substantial size, it is advantageous to organize as a corporation so that its owners can limit their liability. Corporations, then, tend to be far larger, on average, than businesses using other forms of ownership. As Figure 6.2 shows, corporations account for 18 percent of all U.S. businesses but generate almost 82 percent of the revenues. 3 Most large well-known businesses are corporations, but so are many of the smaller firms with which likely you do business.

Figure-6.2-Types-of-Businesses.png

Ownership and Stock

Corporations are owned by shareholders who invest money in the business by buying shares of stock . The portion of the corporation they own depends on the percentage of stock they hold. For example, if a corporation has issued 100 shares of stock, and you own 30 shares, you own 30 percent of the company. The shareholders elect a board of directors , a group of people (primarily from outside the corporation) who are legally responsible for governing the corporation. The board oversees the major policies and decisions made by the corporation, sets goals and holds management accountable for achieving them, and hires and evaluates the top executive, generally called the CEO ( chief executive officer ). The board also approves the distribution of income to shareholders in the form of cash payments called dividends.

Benefits of Incorporation

The corporate form of organization offers several advantages, including limited liability for shareholders, greater access to financial resources, specialized management, and continuity.

Limited Liability

The most important benefit of incorporation is the limited liability to which shareholders are exposed: they are not responsible for the obligations of the corporation, and they can lose no more than the amount that they have personally invested in the company. Limited liability would have been a big plus for the unfortunate individual whose business partner burned down their dry cleaning establishment. Had they been incorporated, the corporation would have been liable for the debts incurred by the fire. If the corporation didn’t have enough money to pay the debt, the individual shareholders would not have been obligated to pay anything. They would have lost all the money that they’d invested in the business, but no more.

Financial Resources

Incorporation also makes it possible for businesses to raise funds by selling stock. This is a big advantage as a company grows and needs more funds to operate and compete. Depending on its size and financial strength, the corporation also has an advantage over other forms of business in getting bank loans. An established corporation can borrow its own funds, but when a small business needs a loan, the bank usually requires that it be guaranteed by its owners.

Specialized Management

Because of their size and ability to pay high sales commissions and benefits, corporations are generally able to attract more skilled and talented employees than are proprietorships and partnerships.

Continuity and Transferability

Another advantage of incorporation is continuity . Because the corporation has a legal life separate from the lives of its owners, it can (at least in theory) exist forever.

Transferring ownership of a corporation is easy: shareholders simply sell their stock to others. Some founders, however, want to restrict the transferability of their stock and so choose to operate as a privately-held corporation. The stock in these corporations is held by only a few individuals, who are not allowed to sell it to the general public.

Companies with no such restrictions on stock sales are called public corporations; stock is available for sale to the general public.

Drawbacks to Incorporation

Like sole proprietorships and partnerships, corporations have both positive and negative aspects. In sole proprietorships and partnerships, for instance, the individuals who own and manage a business are the same people. Corporate managers, however, don’t necessarily own stock, and shareholders don’t necessarily work for the company. This situation can be troublesome if the goals of the two groups differ significantly.

Managers, for example, are often more interested in career advancement than the overall profitability of the company. Stockholders might care more about profits without regard for the well-being of employees. This situation is known as the agency problem , a conflict of interest inherent in a relationship in which one party is supposed to act in the best interest of the other. It is often quite difficult to prevent self-interest from entering into these situations.

Another drawback to incorporation—one that often discourages small businesses from incorporating—is the fact that corporations are more costly to set up. When you combine filing and licensing fees with accounting and attorney fees, incorporating a business could set you back by $1,000 to $6,000 or more depending on the size and scope of your business. 4 Additionally, corporations are subject to levels of regulation and governmental oversight that can place a burden on small businesses. Finally, corporations are subject to what’s generally called “ double taxation .” Corporations are taxed by the federal and state governments on their earnings. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends. Corporate profits are thus taxed twice—the corporation pays the taxes the first time and the shareholders pay the taxes the second time.

Five years after starting their ice cream business, Ben Cohen and Jerry Greenfield evaluated the pros and cons of the corporate form of ownership, and the “pros” won. The primary motivator was the need to raise funds to build a $2 million manufacturing facility. Not only did Ben and Jerry decide to switch from a partnership to a corporation, but they also decided to sell shares of stock to the public (and thus become a public corporation). Their sale of stock to the public was a bit unusual: Ben and Jerry wanted the community to own the company, so instead of offering the stock to anyone interested in buying a share, they offered stock to residents of Vermont only. Ben believed that “business has a responsibility to give back to the community from which it draws its support.” 5 He wanted the company to be owned by those who lined up in the gas station to buy cones. The stock was so popular that one in every hundred Vermont families bought stock in the company. 6 Eventually, as the company continued to expand, the stock was sold on a national level.

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Other Types of Business Ownership

In addition to the three commonly adopted forms of business organization—sole proprietorship, partnership, and regular corporations—some business owners select other forms of organization to meet their particular needs. We’ll look at two of these options:

  • Limited-liability companies
  • Not-for-profit corporations

Limited-Liability Companies

How would you like a legal form of organization that provides the attractive features of the three common forms of organization (corporation, sole proprietorship and partnership) and avoids the unattractive features of these three organization forms? The limited-liability company (LLC) accomplishes exactly that. This form provides business owners with limited liability (a key advantage of corporations) and no “double taxation” (a key advantage of sole proprietorships and partnerships). Let’s look at the LLC in more detail.

In 1977, Wyoming became the first state to allow businesses to operate as limited-liability companies. Twenty years later, in 1997, Hawaii became the last state to give its approval to the new organization form. Since then, the limited-liability company has increased in popularity. Its rapid growth was fueled in part by changes in state statutes that permit a limited-liability company to have just one member. The trend to LLCs can be witnessed by reading company names on the side of trucks or on storefronts in your city. It is common to see names such as Jim Evans Tree Care, LLC, and For-Cats-Only Veterinary Clinic, LLC. But LLCs are not limited to small businesses. Companies such as Crayola, Domino’s Pizza, Ritz-Carlton Hotel Company, and iSold It (which helps people sell their unwanted belongings on eBay) are operating under the limited-liability form of organization.

In a limited-liability company, owners (called members rather than shareholders) are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level (thereby eliminating double taxation).

We have touted the benefits of limited liability protection for an LLC. We now need to point out some circumstances under which an LLC member (or a shareholder in a corporation) might be held personally liable for the debts of his or her company. A business owner can be held personally liable if he or she:

  • Personally guarantees a business debt or bank loan which the company fails to pay.
  • Fails to pay employment taxes to the government.
  • Engages in fraudulent or illegal behavior that harms the company or someone else.
  • Does not treat the company as a separate legal entity, for example, uses company assets for personal uses.

Not-for-Profit Corporations

A not-for-profit corporation (sometimes called a nonprofit) is an organization formed to serve some public purpose rather than for financial gain. As long as the organization’s activity is for charitable, religious, educational, scientific, or literary purposes, it can be exempt from paying income taxes. Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions. The types of groups that normally apply for nonprofit status vary widely and include churches, synagogues, mosques, and other places of worship; museums; universities; and conservation groups.

There are more than 1.5 million not-for-profit organizations in the United States. 7 Some are extremely well funded, such as the Bill and Melinda Gates Foundation, which has an endowment of approximately $40 billion and has given away $36.7 billion since its inception. 8 Others are nationally recognized, such as United Way, Goodwill Industries, Habitat for Humanity, and the Red Cross. Yet the vast majority is neither rich nor famous, but nevertheless makes significant contributions to society.

Mergers and Acquisitions

The headline read, “Wanted: More than 2,000 in Google Hiring Spree.” 9 The largest Web search engine in the world was disclosing its plans to grow internally and increase its workforce by more than 2,000 people, with half of the hires coming from the United States and the other half coming from other countries. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.

An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 + 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.

Though they are often used as if they’re synonymous, the terms merger and acquisition mean slightly different things. A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another. An example of a merger is the merging in 2013 of US Airways and American Airlines. The combined company, the largest carrier in the world, flies under the name American Airlines.

Another example of an acquisition is the purchase of Reebok by Adidas for $3.8 billion. 10 The deal was expected to give Adidas a stronger presence in North America and help the company compete with rival Nike. Once this acquisition was completed, Reebok as a company ceased to exist, though Adidas still sells shoes under the Reebok brand.

Motives behind Mergers and Acquisitions

Companies are motivated to merge or acquire other companies for a number of reasons, including the following.

Gain Complementary Products

Acquiring complementary products was the motivation behind Adidas’s acquisition of Reebok. As Adidas CEO Herbert Hainer stated in a conference call, “This is a once-in- a-lifetime opportunity. This is a perfect fit for both companies, because the companies are so complementary…. Adidas is grounded in sports performance with such products as a motorized running shoe and endorsement deals with such superstars as British soccer player David Beckham. Meanwhile, Reebok plays heavily to the melding of sports and entertainment with endorsement deals and products by Nelly, Jay-Z, and 50 Cent. The combination could be deadly to Nike.” Of course, Nike has continued to thrive, but one can’t blame Hainer for his optimism. 11

Attain New Markets or Distribution Channels

Gaining new markets was a significant factor in the 2005 merger of US Airways and America West. US Airways was a major player on the East Coast, the Caribbean, and Europe, while America West was strong in the West. The expectations were that combining the two carriers would create an airline that could reach more markets than either carrier could do on its own. 12

Realize Synergies

The purchase of Pharmacia Corporation (a Swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical company based in the United States) in 2003 created one of the world’s largest drug makers and pharmaceutical companies, by revenue, in every major market around the globe. 13 The acquisition created an industry giant with more than $48 billion in revenue and a research-and-development budget of more than $7 billion. Each day, almost forty million people around the globe are treated with Pfizer medicines. 14 Its subsequent $68 billion purchase of rival drug maker Wyeth further increased its presence in the pharmaceutical market. 15

In pursuing these acquisitions, Pfizer likely identified many synergies : quite simply, a whole that is greater than the sum of its parts. There are many examples of synergies. A merger typically results in a number of redundant positions; the combined company does not likely need two vice-presidents of marketing, two chief financial officers, and so on. Eliminating the redundant positions leads to significant cost savings that would not be realized if the two companies did not merge. Let’s say each of the companies was operating factories at 50% of capacity, and by merging, one factory could be closed and sold. That would also be an example of a synergy. Companies bring different strengths and weaknesses into the merged entity. If the newly-combined company can take advantage of the marketing capabilities of the stronger entity and the distribution capabilities of the other (assuming they are stronger), the new company can realize synergies in both of these functions.

Hostile Takeover

What happens, though, if one company wants to acquire another company, but that company doesn’t want to be acquired? The outcome could be a hostile takeover —an act of assuming control that’s resisted by the targeted company’s management and its board of directors. Ben Cohen and Jerry Greenfield found themselves in one of these situations: Unilever—a very large Dutch/British company that owns three ice cream brands—wanted to buy Ben & Jerry’s, against the founders’ wishes. Most of the Ben & Jerry’s stockholders sided with Unilever. They had little confidence in the ability of Ben Cohen and Jerry Greenfield to continue managing the company and were frustrated with the firm’s social-mission focus. The stockholders liked Unilever’s offer to buy their Ben & Jerry’s stock at almost twice its current market price and wanted to take their profits. In the end, Unilever won; Ben & Jerry’s was acquired by Unilever in a hostile takeover. 16 Despite fears that the company’s social mission would end, it didn’t happen. Though neither Ben Cohen nor Jerry Greenfield are involved in the current management of the company, they have returned to their social activism roots and are heavily involved in numerous social initiatives sponsored by the company.

Chapter Video: Business Structures

Here is a short video providing a simple and straightforward recap of the key points of each form of business ownership.

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A YouTube element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/biz3/?p=73

(Copyrighted material)

Key Takeaways

  • A sole proprietorship, a business owned by only one person, accounts for 72% of all U.S. businesses.
  • Advantages include: complete control for the owner, easy and inexpensive to form, and owner gets to keep all of the profits.
  • Disadvantages include: unlimited liability for the owner, complete responsibility for talent and financing, and business dissolves if the owner dies.
  • A general partnership is a business owned jointly by two or more people, and accounts for about 10% of all U.S. businesses.
  • Advantages include: more resources and talents come with an increase in partners, and the business can continue even after the death of a partner.
  • Disadvantages include: partnership disputes, unlimited liability, and shared profits.
  • A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.
  • A corporation is a legal entity that’s separate from the parties who own it, the shareholders who invest by buying shares of stock. Corporations are governed by a Board of Directors, elected by the shareholders.
  • Advantages include: limited liability, easier access to financing, and unlimited life for the corporation.
  • Disadvantages include: the agency problem, double taxation, and incorporation expenses and regulations.
  • A limited-liability company (LLC) is a business structure that combines the tax treatment of a partnership with the liability protection of a corporation.
  • A not-for-profit corporation is an organization formed to serve some public purpose rather than for financial gain. It enjoys favorable tax treatment.
  • A merger occurs when two companies combine to form a new company.
  • An acquisition is the purchase of one company by another with no new company being formed. A hostile takeover occurs when a company is purchased even though the company’s management and Board of Directors do not want to be acquired.

Chapter 6 Text References and Image Credits

Image credits: chapter 6.

Figure 6.1: Dismas (2010). “ Ben Cohen and Jerry Greenfield in 2010 .” CC by SA 3.0 Retrieved from: https://en.Wikipedia.org/wiki/Ben_%26_Jerry%27s – /media/File:Ben_and_Jerry.jpg .

Figure 6.2: “Types of U.S. Businesses.” Data source: “Number of Tax Returns, Receipts, and Net Income by Type of Business.” Census.gov . Retrieved from: www.census.gov/prod/2011pubs/12statab/business.pdf

Video Credits: Chapter 6

“Business Structures.” (Bean Counter). March 9, 2014. Retrieved from: https://www.youtube.com/watch?v=z-GLrHhuDEM

References: Chapter 6

BUS101: Introduction to Business

form of business ownership in business plan

Forms of Business Ownership

Review this overview of the various forms of business ownership, including advantages and disadvantages, to learn about some of the factors that go into deciding which form is best for any given situation. No hard and fast formula helps an entrepreneur pick the proper form. However, there are some important considerations, such as risk, taxes, transferability, and even image. After you read, complete the concept check questions about the different types of business structures: sole proprietorship, partnership, and corporations.

Introduction

form of business ownership in business plan

Learning Outcomes

After reading this chapter, you should be able to answer these questions:

  • What are the advantages and disadvantages of the sole proprietorship form of business organization?
  • What are the advantages of operating as a partnership, and what downside risks should partners consider?
  • How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?
  • What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations?
  • What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance?
  • Why are mergers and acquisitions important to a company's overall growth?
  • What current trends will affect the business organizations of the future?

EXPLORING BUSINESS CAREERS

Jessica maclean, sole proprietor.

In most any elementary school classroom, at least one child's answer to the question, "What do you want to do with your life?" will be, "A lawyer". One of the most popular careers, lawyers are powerful figures in society, shaping our laws and ensuring that we adhere to them. Their prominence and power have led to the stereotype of rich, career-driven lawyers, often leaving no room in our minds for those who truly want to bring justice to the world. However, Jessica MacLean, a lawyer focusing primarily on women's rights, is quick to say that, as with many stereotypes, that is only one side of the story. "I know because I lived that - I was on my way to being a successful corporate lawyer. But I realized what I was doing and how different that was from why I'd started practicing. So I walked away from it all to start my own practice".

Nervous about the prospect of private practice, she has chosen to operate as a sole proprietorship for now. Sole proprietorships are easy to set up for people who want to work on their own, prefer direct control of the business, and desire the flexibility to sell the business or close the doors at any time. "For me, it's the best choice because I am not responsible for or to anyone else. I can easily dissolve the business if I find it is not proceeding how I'd planned. More positively, too, if it does succeed, I know that success is due to my hard work.

Indeed MacLean's law career was not always in corporate law. She turned her sights toward law after a gender and communications professor at DePaul University suggested her argumentative style might be an asset in that profession. "She said I needed to tone it down for class - that the other students seemed afraid to speak up - but then asked if I'd ever considered being a lawyer". MacLean, who had always been interested in issues of justice and legality surrounding women, took her professor's advice and made the leap into law.

While in law school, she clerked for the city of Chicago in their department of personnel's sexual harassment office and volunteered for the Cook County state's attorney's office in the domestic violence division. The cases she worked on were emotionally trying. Despite the difficulty of the cases, she was drawn to them, compelled by the people she helped and the change she was able to effect. After school, she continued in related practice, working first for the Cook County state's attorney's office.

After several years with the state's attorney's office, she needed a change. It was then that MacLean decided to work for a corporation, a form of business that you will learn about in this chapter. "Why did I switch to corporate law? I think I was burnt out, to some extent. It's so hard to work on those cases, day after day. I needed to see if I would be better somewhere else".

Having enjoyed the rewards of working with the state's attorney's office and a corporation and being a sole proprietor, in 2014 MacLean joined a limited liability partnership (LLP, a form of business that you will learn about in this chapter) firm in Chicago. As her needs changed, the form and type of business organization she has worked for has changed also.

This chapter discusses sole proprietorships, as well as several other forms of business ownership, including partnerships and corporations, and compares the advantages and disadvantages of each.

With a good idea and some cash in hand, you decide to start a business. But before you get going, you need to ask yourself some questions that will help you decide what form of business organization will best suit your needs.

Would you prefer to go it alone as a  sole proprietorship,  or do you want others to share your burdens and challenges in a  partnership ? Or would the limited liability protection of a  corporation,  or perhaps the flexibilit y  of a  limited liability company (LLC),  make more sense?

There are other questions you need to consider too: Will you need financing? How easy will it be to obtain? Will you attract employees? How will the business be taxed, and who will be liable for the company's debts? If you choose to share ownership with others, how much operating control would they want, and what costs would be associated with that?

As  Table 4.1  illustrates, sole proprietorships are the most popular form of business ownership, accounting for 72 percent of all businesses, compared with 10 percent for partnerships and 18 percent for corporations. Because most sole proprietorships and partnerships remain small, corporations generate approximately 81 percent of total business revenues and 58 percent of total profits.

Most start-up businesses select one of these major ownership forms. In the following pages, we will discover the advantages and disadvantages of each form of business ownership and the factors that may make it necessary to change from one form of organization to another as the needs of the business change. As a company expands from small to midsize or larger, the form of business structure selected in the beginning may no longer be appropriate.

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Business Plan Tutorial: Types of Business Ownership for 2024

form of business ownership in business plan

The decision to own and operate a business can be both exciting and daunting. Business ownership is a multifaceted concept that requires careful planning, preparation, and execution. In this tutorial, we will explore the different types of business ownership and provide a comprehensive guide to creating a successful business plan.

Overview of Business Ownership

Business ownership refers to the legal ownership and control of a business entity. There are several types of business ownership structures, including sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each structure has its own unique advantages and disadvantages, depending on the nature of the business and the goals of the owner.

For instance, sole proprietorships are the simplest form of ownership and are owned and operated by a single individual. They are easy to set up and require minimal regulatory compliance. However, sole proprietors are personally liable for all the debts and obligations of the business, which can be a significant drawback.

On the other hand, corporations are complex legal entities established under state law. They provide limited liability protection to their owners, meaning that the shareholders are not personally liable for the company’s debts and obligations. However, corporations are subject to significant regulation and require a high level of administrative and legal compliance.

Why Is Business Ownership Important?

Entrepreneurship and business ownership play a critical role in the global economy. Small businesses are the backbone of many local economies, providing jobs and driving innovation and economic development. Moreover, owning a business can provide financial independence, personal fulfillment, and the opportunity to make a positive impact on society.

However, owning a business is not without its challenges. Developing a successful business requires careful planning and execution, as well as a deep understanding of the market, competitors, and industry trends. Moreover, business owners must be prepared to navigate a complex regulatory landscape and manage risks associated with legal liabilities and financial fluctuations.

Business ownership is an essential component of economic growth and provides individuals with the opportunity to create wealth, pursue their passions, and make a positive impact on their communities. However, it requires careful planning, preparation, and execution to succeed in today’s highly competitive market. In the following sections, we will provide a step-by-step guide to creating a successful business plan, including choosing the right ownership structure, conducting market research, developing a marketing strategy, and securing funding.

Sole Proprietorship

A. definition of sole proprietorship.

A sole proprietorship is a type of business ownership where the business is owned and operated by one person. It is the simplest and most common form of business entity in the United States. The owner of the business has complete control over all aspects of the company, including finances, operations, and decision-making.

B. Advantages of Sole Proprietorship

One major advantage of a sole proprietorship is that it is easy and inexpensive to set up. The owner does not have to file any formal paperwork or pay any registration fees. Another advantage is the flexibility that the owner has in running the business. Because there are no partners or shareholders, the owner has complete control over the direction of the business and can make decisions quickly and without any consultation.

A sole proprietorship also offers tax benefits. The owner of the business can deduct all of the business expenses from their personal income taxes. This can include things like office supplies, travel expenses, and even a portion of their home expenses if they work from home.

C. Disadvantages of Sole Proprietorship

While there are many advantages to operating a sole proprietorship, there are also some disadvantages. One major disadvantage is that the owner of the business is personally responsible for all of the debts and liabilities of the business. This means that if the business runs into financial trouble or is sued, the owner’s personal assets may be at risk.

Another disadvantage is that it can be difficult to raise capital for the business. Because the owner is the only investor in the company, they must rely on their own savings or loans from family and friends to fund the business.

D. Examples of Sole Proprietorship

Some examples of sole proprietorships include small businesses such as freelance writers, consultants, and hairstylists. These types of businesses are typically run out of the owner’s home or a small office space and require little investment to get started.

Another example of a sole proprietorship is a food truck vendor. The owner of the business is responsible for everything from purchasing the food and supplies to cooking and selling it to customers.

A sole proprietorship can be a great option for entrepreneurs who want complete control over their business and are comfortable with the risks that come with being personally responsible for its debts and liabilities. However, it is important to carefully consider the advantages and disadvantages before deciding if this type of business ownership is right for you.

Partnership

Partnership is a business structure that involves two or more individuals who share ownership and management responsibilities, as well as the profits and losses of the business. There are different types of partnerships, each with unique characteristics, advantages, and disadvantages.

A. Definition of Partnership

A partnership is a legal agreement between two or more persons who agree to carry on a business with a view to making a profit. The partners agree to share in the management of the business, as well as the profits and losses.

B. Types of Partnership

There are three types of partnership, including:

1. General Partnership

General partnership is the most common type of partnership, where all partners share equal responsibility and liability for the business. Each partner contributes to the capital and takes an active role in managing the business.

2. Limited Partnership

Limited partnership is a form of partnership where one or more partners have limited liability and do not participate in the day-to-day management of the business. They are called silent partners and only contribute capital to the business.

3. Limited Liability Partnership

Limited Liability Partnership (LLP) is a type of partnership where each partner is only liable for their own acts and not those of their partners. LLPs are common among professional service firms such as lawyers and accountants.

C. Advantages of Partnership

There are several advantages to forming a partnership, including:

Shared responsibility and resources: Partners can share responsibilities and resources, as well as leverage their respective expertise and networks to grow the business.

Pooling of funds and capital: Partners can pool their resources and capital to start and grow the business, which may be especially beneficial in cases where individual partners have limited financial resources.

Flexibility: Partnerships can be more flexible than corporations when it comes to management and decision-making, as partners have more freedom to make decisions and run the business as they see fit.

D. Disadvantages of Partnership

There are also some disadvantages to forming a partnership, including:

Unlimited liability: General partners have unlimited liability, which means that they are personally liable for the debts and obligations of the business.

Potential for disagreements: Partnerships can be challenging when partners have different goals, objectives, or work styles, which can lead to disagreements and conflicts.

Limited growth potential: Partnerships may have limited growth potential compared to corporations, especially when it comes to raising capital or attracting investors.

E. Examples of Partnership

Some examples of successful partnerships include:

Ben & Jerry’s: The famous ice cream brand was founded by Ben Cohen and Jerry Greenfield, who started the business as a partnership in 1978.

Hewlett-Packard: The technology giant was founded by Bill Hewlett and Dave Packard, who started the business as a partnership in 1939.

Limited Liability Company (LLC)

A. definition of llc.

A Limited Liability Company (LLC) is a hybrid business entity structure that combines the flexibility of a partnership with the limited liability of a corporation. LLCs have distinct legal personalities, which means that they’re separate from the owners, known as members. LLCs have become popular among small business owners, as they offer the benefits of both sole proprietorships and corporations.

B. Advantages of LLC

The advantages of forming an LLC include:

Limited Liability : Members of an LLC are not personally liable for the debts or obligations of the company. In other words, their personal assets are protected from any legal action taken against the LLC.

Pass-Through Taxation : LLCs are taxed as pass-through entities, which means that profits and losses are reported on the individual tax returns of the members. This can lead to lower tax rates, as well as the ability to deduct losses against other income.

Flexibility : LLCs are flexible in terms of ownership structure and management. Members can be individuals or other entities, and they can choose to manage the company themselves or designate a manager.

Simplicity : LLCs have fewer formalities than corporations, including fewer required meetings and less complex record-keeping.

C. Disadvantages of LLC

The disadvantages of forming an LLC include:

Limited Life : LLCs have a limited lifespan that’s determined by the operating agreement. This means that the LLC may need to dissolve if a member chooses to leave the company or dies.

Self-Employment Taxes : Members of an LLC are subject to self-employment taxes, which can add up to a significant amount.

State Requirements : LLCs are subject to state regulations, which can vary depending on where the company is located. This can lead to additional costs and paperwork.

D. Examples of LLC

Some examples of LLCs include:

LLC for Freelance Writers : A freelance writer could form an LLC to protect their personal assets and take advantage of pass-through taxation.

LLC for Real Estate Investors : Real estate investors often form LLCs to limit their personal liability and take advantage of tax benefits.

LLC for Family Business Owners : Family business owners can use an LLC to simplify their governance structure and protect their personal assets.

LLCs offer the benefits of limited liability, pass-through taxation, flexibility, and simplicity. However, they also have some disadvantages, such as limited lifespan, self-employment taxes, and state requirements. Depending on the needs of the business, an LLC can be a great choice for a business owner looking to protect their personal assets while enjoying the tax benefits of a pass-through entity.

Corporation

A corporation, also known as a limited liability company, is a legal entity that is separate from its owners. It has its own legal rights and liabilities, can own property, enter into contracts, and can sue or be sued.

A. Definition of Corporation

A corporation is incorporated under state law and is considered a separate legal entity from its shareholders or owners. This means that the corporation can own property, enter into contracts, and conduct business in its own name.

B. Types of Corporation

There are several types of corporations, including:

  • C Corporations: These are the most common types of corporations and offer limited liability protection to shareholders. They are taxed as a separate entity and can issue stock to raise capital.
  • S Corporations: These are similar to C corporations, but they have a special tax designation that allows them to avoid double taxation.
  • B Corporations: These are businesses that are certified for their social and environmental responsibility in addition to their financial performance.
  • Non-profit corporations: These are corporations that are organized for charitable or educational purposes and are exempt from paying taxes.

C. Advantages of Corporation

There are several advantages to forming a corporation, including:

  • Limited liability: Shareholders are not personally liable for the corporation’s debts or legal issues.
  • Ability to raise capital: Corporations can offer stock to raise funds for expansion or other business needs.
  • Perpetual existence: A corporation can exist indefinitely, regardless of changes in ownership.

D. Disadvantages of Corporation

There are also some disadvantages to forming a corporation, including:

  • Double taxation: C corporations are taxed as a separate entity, and then shareholders are also taxed on their individual income from the corporation.
  • More administrative work: Corporations require more paperwork and recordkeeping than other types of businesses.
  • Potentially complicated ownership structures: Corporations can have multiple shareholders and may involve complex ownership structures.

E. Examples of Corporation

Some well-known corporations include:

  • Microsoft Corporation
  • Coca Cola Company
  • Amazon, Inc.
  • McDonald’s Corporation

These corporations all have a large number of shareholders and have grown to become some of the largest companies in the world.

Cooperatives

A. definition of cooperatives.

Cooperatives are a type of business organization that is owned and controlled by the people who use its services or products. They are run on a democratic basis providing each member with an equal vote in the decision-making process.

Cooperatives may be formed for social, cultural, or economic purposes. However, the fundamental principles of cooperatives are that they are open to all people who share a common goal, who assume responsibility, and who participate in the business.

B. Types of Cooperatives

There are several types of cooperatives that may be formed. These include:

1. Consumer Cooperative

This type of cooperative is owned by the consumers who use its products or services. The purpose of a consumer cooperative is to provide high-quality products or services at a fair price to its members.

2. Producer Cooperative

A producer cooperative is owned by producers who share resources and expertise to produce and market products or services. This type of cooperative helps small-scale producers to compete effectively in the marketplace.

3. Worker Cooperative

A worker cooperative is owned and operated by its employees. The workers actively participate in the decision-making process and share in the profits of the business.

4. Housing Cooperative

A housing cooperative is a type of cooperative that provides affordable and sustainable housing for its members. Members own shares in the cooperative and have the right to occupy a unit within the housing facility.

C. Advantages of Cooperatives

There are many advantages of cooperatives, including:

  • Democratic structure and decision-making process
  • Shared expenses and risks
  • Improved bargaining power
  • Shared profits and benefits
  • Enhanced sense of community and cooperation

D. Disadvantages of Cooperatives

Despite the benefits, cooperatives also have some disadvantages, such as:

  • Limited access to capital
  • Difficulty in attracting new members
  • Time-intensive decision-making process
  • Difficulty in retaining members and keeping engagement levels high

E. Examples of Cooperatives

Some examples of successful cooperatives include:

  • Mondragon Corporation, a Spanish worker cooperative that is the largest in the world and has over 80,000 members
  • The Co-operative Group, a British consumer cooperative that operates various businesses including supermarkets, funeral homes, and legal services
  • Ocean Spray, an American producer cooperative that is owned by more than 700 cranberry farmers

Cooperatives can be a beneficial business ownership structure for those who share a common goal and are willing to participate actively in the decision-making process. However, they also have their limitations and may not be suitable for all types of businesses.

Franchising is a popular form of business ownership where one party, the franchisor, grants the franchisee the right to operate a business under their trademark, marketing, and operational support.

A. Definition of Franchises

A franchise is a legal agreement between the franchisor and the franchisee where the franchisor provides the franchisee with a proven business model to follow. The franchisee pays an initial fee and ongoing royalties to the franchisor in exchange for the use of the franchisor’s trademark, products, services, and operating system.

B. Types of Franchises

There are various types of franchises that a business can adopt. The most common include:

Product Distribution Franchise – This type of franchise allows the franchisee to sell a manufacturer’s products.

Business Format Franchise – This type of franchise provides the franchisee with complete guidance on how to run the business, including the operational system, marketing, training, and ongoing support.

Management Franchise – This type of franchise offers the franchisee the right to manage an existing business.

C. Advantages of Franchises

There are several advantages of owning a franchise, including:

  • Established brand and reputation
  • Proven business model
  • Ongoing support and training
  • Group purchasing power
  • Shared marketing and advertising costs

D. Disadvantages of Franchises

Although franchising has many advantages, it also has some disadvantages, including:

  • High initial franchise fees
  • Ongoing monthly royalties
  • Limited flexibility in decision-making
  • Limited product offerings
  • Restrictions on operations and marketing

E. Examples of Franchises

Some popular franchise examples include:

  • McDonald’s – a fast-food restaurant franchise
  • Subway – a sandwich and salad franchise
  • 7-Eleven – a convenience store franchise
  • Anytime Fitness – a gym and fitness franchise

Franchising is a business model that offers many advantages and disadvantages to potential business owners. Understanding the different types of franchises and their pros and cons is essential to determine whether franchising is the right business ownership option for you.

Choosing the Right Business Ownership

When starting a business, one of the most important decisions you’ll make is choosing the right business ownership. There are several types of business ownership, including sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). Each type has its own advantages and disadvantages, and choosing the right one depends on a variety of factors.

A. Factors to Consider

The first factor to consider when choosing the right business ownership is the amount of control you want over your business. For example, if you want complete control over your business, a sole proprietorship may be the best option. On the other hand, if you want to share control with others and have access to additional resources, a partnership or corporation may be a better choice.

Another factor to consider is the level of personal liability you’re comfortable with. Sole proprietors and partnerships have unlimited personal liability, which means that personal assets can be used to pay business debts. In contrast, corporations and LLCs offer limited personal liability protection.

Finally, you’ll also want to consider your long-term goals for your business. For example, if you plan to take your business public, a corporation may be the best choice. If you plan to keep your business small and family-owned, a sole proprietorship or LLC may be a better fit.

B. Legal Requirements

Once you’ve determined the type of business ownership that best fits your needs, you’ll need to comply with legal requirements. Each type of ownership has different legal requirements, such as registering the business name, obtaining necessary licenses and permits, and filing the appropriate tax forms.

It’s important to speak with an attorney to ensure all legal requirements are met and to avoid any legal issues down the line.

C. Tax Implications

Different types of business ownership also have different tax implications. For example, sole proprietors and partnerships are taxed as individuals, while corporations and LLCs are taxed as separate entities. The tax structure you choose will affect how much you pay in taxes and the types of deductions you can take.

To ensure you’re taking advantage of all available tax benefits, it’s important to consult with an accountant or tax professional.

D. Funding Considerations

The type of business ownership you choose can also affect your ability to secure funding for your business. For example, corporations and LLCs have access to more funding sources, such as venture capitalists and angel investors. In contrast, sole proprietors and partnerships may have a harder time securing funding.

Before deciding on a business structure, it’s important to consider how you plan to finance your business and choose a structure that aligns with your funding needs.

Choosing the right business ownership is a crucial decision that should not be taken lightly. By considering factors such as control, personal liability, long-term goals, legal requirements, tax implications, and funding considerations, you can make an informed decision that sets your business up for success.

How to Create a Business Plan for Each Business Ownership

When it comes to creating a business plan, the process may differ depending on your type of business ownership. In this section, we’ll guide you through creating a business plan for each of the following types of ownership:

A. Sample Business Plan for Sole Proprietorship

As a sole proprietor, your business is owned and operated by you alone. When creating your business plan, focus on your personal goals and objectives for the business, as well as its unique selling proposition. Here are a few key areas to include in your business plan:

  • Executive Summary: A concise overview of your business, including its purpose, target market, and financial projections.
  • Products/Services: A detailed description of the products or services you offer, including pricing and how they meet the needs of your target market.
  • Marketing Plan: An overview of your marketing strategy, including how you plan to reach your target market, your budget, and your timeline.
  • Financial Plan: A projection of your revenue, expenses, and profits for the first year, as well as a break-even analysis.

B. Sample Business Plan for Partnership

As a partnership, your business is owned and operated by two or more individuals. When creating your business plan, it’s important to clearly define each partner’s role and responsibilities. Here are a few key areas to include in your business plan:

  • Partnership Structure: A description of the roles and responsibilities of each partner, as well as how decisions will be made and profits will be split.

C. Sample Business Plan for LLC

As an LLC (limited liability company), your business is owned by one or more individuals who are protected from personal liability. When creating your business plan, focus on your unique value proposition and the benefits of your LLC structure. Here are a few key areas to include in your business plan:

  • LLC Structure: An overview of your LLC structure, including the roles and responsibilities of each member, as well as any operating agreements.
  • Marketing Plan: A detailed overview of your marketing strategy, including how you plan to reach your target market, your budget, and your timeline.

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10 Types of Business Ownership (+Pros and Cons of Each)

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Before starting a business, pick the best ownership model that fits your needs. Business ownership types are not created equal. They all have unique benefits and limitations that make them suitable for some situations and bad for others.

Are you better off as a sole owner, or do you want to share ownership rights with others? How do you want to pay your taxes? Are you open to sharing ownership with other partners?

Read on to learn the differences between different ownership styles and choose the best one for you.

Comparison of Different Business Ownership Styles (Winners & Losers)

10 common types of business ownership for starting entrepreneurs.

Business ownership is the structure that determines who owns an organization. Every business has at least one owner with the legal right to dictate how the company operates.

The ownership type you choose impacts how your business can run and what it can do. Your choice determines how much external funding your business gets from investors and tax deductions.

Do you know 51.4% of business owners in the United States of America (USA) are men, while 48.6% are women?

Here are 10 common forms of business ownership, including their benefits and limitations.

1. Sole Proprietorship. Perfect Ownership for Low-Risk Small Businesses.

A sole proprietorship is the simplest form of business owned by an individual. Many individuals use this legal structure because it is easier and cheaper to start than others.

Sole proprietors don’t require the approval of a director board or partner for any business-related decision. They can decide what happens to the business assets, hire and sack employees, and make all vital decisions.

Although it gives absolute power to the owner, a sole proprietorship has some disadvantages. It is not a separate legal entity, which means the owner is liable for business actions.

A court can order creditors to confiscate the owner’s personal assets if the sole proprietor fails to pay the debt.

A sole proprietorship records profits and losses on the owner’s personal tax return. The business does not pay tax, but the owner pays personal income tax on business profits.

There is no legal requirement for you to open a sole proprietorship. As soon as you start a small business, it falls under this category. However, you must register the business name if you want to use another name except for your legal one.

Depending on your locality and business type, you may need to get a license and any necessary permit.

Sole Propritorships Are a Majority of All Businesses

Examples of sole proprietorships include:

  • Independent contractors like freelance writers, digital marketers, web developers, graphic designers, business consultants, plumbers, and virtual assistants.
  • Business owners such as fitness coaches and daycare operators.

Pros of Sole Proprietorships

  • Easy to Set Up: Creating a sole proprietorship is relatively easy and cheap. The maximum requirement is to register your business name if you are not using your own.
  • Pass-Through Taxation: The business profits and losses go directly to the owner’s personal tax returns. This tax structure prevents double taxation.
  • Total Control Over the Business: The sole proprietor makes every major and minor decision. You can make decisions about running the business without permission from other owners.
  • Easy Liquidation of Assets: If the sole proprietor dies, the next of kin will have no issues liquidating the business assets. There are no external partners to oppose the decision, which makes the process easy.

Cons of Sole Proprietorships

  • High Legal Risks: The sole proprietor has to answer any lawsuit against the business because the law recognizes the business and the owner as a single entity. This can lead to the loss of personal assets.
  • Difficulty in Raising Funds: Sole proprietors face challenges raising funds and obtaining loans. Thankfully, small business loans without credit checks offer sole proprietorship funding with fair interest rates.
  • Difficult in Selling the Business: Selling a sole proprietorship is hard. In most cases, the business is usually small and has few assets, which makes it less attractive to potential buyers.
  • Business Death after Owner’s Demise: If the owner dies, the business may quickly follow suit, except there is a succession plan.

2. Partnership. Best Ownership for Business Partners.

A partnership is a business collaboration involving two or more owners. There is no partnership with one person in the picture. This business entity supports up to 100 owners.

Every individual partner signs a partnership agreement to make the business official. This document contains every necessary detail: the partner's rights, shares, capital contribution, and individual responsibilities.

Examples of businesses that often operate as partnerships include law, accounting, and real estate investment firms.

General Partner VS Limited Partner

There are three types of partnership: general partnership, limited liability partnership, and unlimited liability partnership.

  • General partnership is a business ownership type where two or more partners share responsibilities for all business activities. The general partners actively manage the daily affairs of the business and are liable for the business actions of every partner.
  • Limited Liability Partnership: This type of partnership prevents other partners from losing their assets because of another partner’s actions. In other words, if someone sues a partner for debt, other partners’ assets can not be part of the settlement.
  • Unlimited Liability Partnership: This partnership has an unlimited personal liability, where every partner is responsible for the business actions. If the company owes debt beyond what it can pay, every partner can lose personal assets.

Pros of Partnerships

  • Access to Partners Knowledge: Remember the famous adage “two heads are better than one?” Now imagine the contributions three or more partners can add to a partnership.
  • Easy to Set Up and Run: Don't let the term partnership give you a complex view of the business structure. Setting up and running the day-to-day operations of a general partnership is easy. The requirements are registering your business name and signing a partnership agreement.
  • Better Fundraising Capacity: Raising capital among partners is a viable way to generate funding for business operations. Every partner contributes financially to keep the business running.
  • Division of Labour: In a general partnership, every partner participates in day-to-day business operations, while in a limited partnership, they do not.

Cons of Partnerships

  • Unlimited Liability: In a general partnership, every partner gets affected by the losses or liabilities of the organization. It doesn't matter who caused it; they all share the business liabilities.
  • Lack of Autonomy: Since the business belongs to more than one person, every major decision needs the approval of every partner. For example, if the partner in charge of marketing wants to run a new campaign, every partner has to agree.
  • Potential Conflicts: Since it involves multiple partners, conflicts can arise when partners disagree on vital decisions.

3. Limited Liability Company. A Perfect Type of Ownership for High-Risk Small Businesses.

A limited liability company combines the best features of a sole proprietorship and a corporation. Owners get the flexibility and pass-through taxation benefits of a sole proprietorship or partnership and the liability benefits of a corporation.

This business ownership style is ideal for small businesses with significant risks. It is easier and cheaper to form than a corporation while offering the same liability protection. If your company goes bankrupt or gets hit by a lawsuit, your assets do not contribute to any settlement.

However, liability protection doesn’t cover situations where your personal negligence causes the business to lose or affect another party.

For example:

  • LLC owners are liable if they personally serve as a guarantor for a business loan and the company fails to pay.
  • If they engage in fraudulent or illegal activities through the LLC.

An LLC offers the flexibility to choose how you want to pay taxes. Like sole proprietorship, the company’s profits and losses pass directly to owners, and they file them in their personal income tax returns. In addition, owners can choose to pay corporate taxes like a corporation.

Deciding on a Tax Status

LLCs, using the default pass-through taxation, pay their owners through profit distribution. But for those that use the tax system of a corporation, owners get a fixed salary.

To register an LLC, you must have at least one owner. There is no limit to the number of owners that can form an LLC. However, if you choose the tax structure of an S-corporation, you can have no more than 100 members.

The most important legal documents for forming an LLC are articles of organization and operating agreement.

Examples of well-known limited liability companies include Sony, Blackberry, Anheuser-Busch, Domino's, and Nike.

Pros of Limited Liability Companies

  • Limited Liability : Shareholders can’t be held personally liable for the LLC’s actions because the law recognizes it as a separate legal entity. In the event of a lawsuit, only business assets can form a part of the settlement.
  • Tax Options: LLC makes it possible for the owners to choose how they want to pay taxes. Owners can decide their tax status, either through pass-through taxation or directly as a corporation.
  • Credibility: Unlike sole proprietorship and general partnership, an LLC is a business entity that separates the owner from the company. This characteristic makes the LLC look more reliable to consumers and investors.
  • Simplicity: An LLC is easy and less expensive to form compared to a corporation but more complex than a sole proprietorship. Maintaining an LLC is simple, and there is no requirement for you to set up a board of directors.

Cons of Limited Liability Companies

  • Difficulty in Raising Capital: Raising funds from external investors can be a struggle as an LLC, as it does not offer stock options like a corporation.
  • Limit to Personal Liability Protection: Although an LLC offers its members liability protection, it does not protect them from the consequences of their actions in a lawsuit.

4. Private Corporation. Type of Ownership for Large Family-Owned Companies.

A private corporation is a unique business ownership type owned by a small number of shareholders. Shares are not open to the general public. You can’t trade its shares on any public stock exchange. Only a select group of shareholders can own and exchange shares.

This type of corporation is suitable for large family-owned businesses. Examples of companies that use this ownership style include Koch Industries, Deloitte, Cargill, and Albertsons.

A privately held corporation is not under any obligation to disclose its financial information to the general public. It doesn’t have to file its financial reports with the Securities and Exchange Commission (SEC).

Different countries have limits on how many shareholders a private corporation can have. In the United States, the maximum number of shareholders is 2,000.

In Australia, the maximum is fifty (50) non-employee shareholders. The number of shareholders can be more than 50 if you have employees owning shares in the corporation.

Starting a private company requires articles of incorporation. Here, you state your shareholders’ names and the number of shares they own.

Largest Private Companies in the World by Revenue

Pros of Private Corporations

  • Financial Privacy: A private corporation doesn’t have to release finance details to the general public. If it makes a huge profit or loss, it can keep its records in-house.
  • Fast Decision Making: With a small number of shareholders, it is easier to make business decisions.
  • Limited Liability: This business ownership protects stakeholders' assets from being seized if the company experiences a loss.
  • Exchange of Shares: In privately held companies, only internal shareholders can own, buy, and sell shares. This structure is ideal for family-owned businesses that want to keep ownership within the family.

Cons of Private Corporations

  • Long Registration Process: Registering a privately held company is expensive and takes longer to set up than a sole proprietorship and a partnership. A verbal agreement is not sufficient to establish a private corporation. You have to submit the articles of incorporation in the state the company operates.
  • Fundraising Restriction: Owners can’t sell shares to the public to raise funds. This restriction can affect the growth of the company.

5. Nonprofit Corporation. Best Business Ownership for Nonprofits.

A nonprofit corporation is a non-ownership structure formed to serve society. Unlike other businesses, its primary objective is not to make profits but to serve the public good.

Even when it makes profits, it reinvests it in its mission. Examples of nonprofit corporations include charitable, scientific, educational, religious, health, animal, human rights, and cruelty-prevention organizations.

Breakdown of Categories for Nonprofit Organizations

What is a nonprofit and how do we identify them

The most striking advantage of the nonprofit corporation is that it enjoys tax-exempt status.

Because of its unique structure, nobody can own a nonprofit corporation. But what about the people who start it? They have no ownership but can be a part of the board of directors or trustees running the nonprofit.

However, it is illegal for the board of directors to run the nonprofit in a way that generates profits for individuals. The nonprofit is accountable to the general public, government agencies, and the country’s tax body.

Setting up a nonprofit organization requires registering a name, forming a board of directors, filing articles of incorporation, and applying for tax-exempt status.

Examples of nonprofit organizations include The Bill and Melinda Gates Foundation, Habitat for Humanity, Red Cross, and Amnesty International.

Pros of Nonprofit Corporations

  • Limited Liability Protection: The nonprofit is a separate legal entity from its founders. They enjoy personal liability protection from the nonprofit’s actions.
  • Tax Exemption: Nonprofits can get a tax exemption status from the government. This tax classification prevents them from paying any tax.
  • Grant Eligibility: Nonprofits carry out charity work and are eligible to apply for grants from various organizations, private sponsors, and governments.

Cons of Nonprofit Corporations

  • Lots of Paperwork: Starting a nonprofit corporation requires you to fill in too much paperwork. The board of directors also has to keep annual records.
  • Limited Activities: A nonprofit corporation can only focus on not-for-profit activities. Membership of the board of directors is usually voluntary. However, members can deduct expenses incurred while carrying out their duties. Some nonprofit corporations may pay their board members, but the paid individuals can lose the protection offered by nonprofits.
  • Limited Access to Funding: Getting funds to execute vital projects can be a challenge. A nonprofit corporation primarily relies on grants and charitable contributions from individuals.

6. Benefit Corporations. Best Ownership Type for Social Entrepreneurs.

A benefit corporation combines the benefits of nonprofit and profit-oriented organizations. This ownership style focuses on making positive social impacts while making profits.

Entrepreneurs who want to make social and economic impacts find this ownership style the most suitable. An example of a social entrepreneur is Blake Mycoskie, founder of TOMS Shoes. For every pair of shoes the company sells, it donates a pair.

The same as a typical corporation, it has shareholders and a board of directors running its affairs. However, while the corporation focuses exclusively on making profits for its shareholders, it places equal attention on promoting the public good.

A benefit corp doesn’t enjoy tax exemptions like a nonprofit. It can choose to subject itself to a corporate income tax like a C corp or not pay it like an S corp.

There is no limit to the number of shareholders a benefit corporation can have. However, if it uses an S corp tax status, it can only have a minimum of 100 shareholders.

The rules for forming a benefit corp vary by state. You need to file articles of incorporation stating its general benefit goal. Some states may require you to publish annual reports accessed by a third party to prove you are true to your social impact goals.

Another way to form this business ownership type is to get your existing corporation certified as a B corp. The requirements are stringent. You have to take a B Lab Impact Assessment every 3 years and pay B Lab fees ranging from $500 to $50,000 annually.

Examples of well-known benefit corporations include Patagonia, Plum Organics, King Arthur Flour Company, and Kickstarter.

B Crop vs Benefit Crop

Pros of Benefit Corporations

  • Social Impact: This ownership structure is attractive for many business owners because it allows them to make profits and contribute to the public good.
  • Attracts Investors: Benefit corps attract investments from people who want to earn a profit and make a social impact.
  • Profit Distribution: Every shareholder is liable to receive a part of the organization's profits as dividends.
  • Limited Liability: Shareholders are not personally liable for any legal claims or losses the business incurs.

Cons of Benefit Corporations

  • Expansive Reporting Requirements: A B corp tenders its financial and social impact reports to stakeholders and regulatory bodies annually.
  • Expensive to Run: Your corporation has to pass an evaluation process to become a benefit corp. However, if you want to turn an existing corporation into a B corp, you must pay a yearly fee. The annual certification fee ranges from $500 to $50,000 annually.
  • Tax Requirement: Unlike a nonprofit, a benefit corp pays taxes for doing social impact work. Since it is a for-profit organization, it does not enjoy a tax-free status.

7. Close Corporation. Suitable for Small Family-Owned Businesses.

A close corporation is owned and run by a select number of shareholders that share close business ties. It can operate as a partnership where shareholders and directors play an active role in the daily management of the corporation.

Like a private corp, the close corporation can’t publicly trade its shares. Only its members at incorporation can buy and exchange shares.

A close corporation is free from the requirements of publicly-traded organizations. It does not need to create a board of directors, submit annual reports, and hold yearly shareholders meetings.

Small family-owned businesses use this structure to keep ownership within close family ties and escape the operational requirements of a corporation.

State statutes govern the activities of close corporations. Some states do not recognize it. Requirements for close corps vary from one state to another. For example, Arizona allows up to 10 owners, while California supports up to 35.

The basic requirements for setting up a close corp are a written shareholder agreement and certificate of incorporation.

Examples of close corporations include Deloitte, H-E-B, Publix Super Markets, and PricewaterhouseCoopers (PwC).

Pros of Close Corporations

  • Operational Flexibility: A close corp has fewer rules to follow. Apart from following the written shareholder agreement, owners can run the corporation without complying with strict corporate regulations.
  • Limited Liability Protection: Like a typical corporation, shareholders enjoy liability protection from the company’s debts.
  • Freedom from Outside Pressure: This corporation is strictly exclusive to a select group, preventing pressure from external shareholders.
  • Easier Decision-Making: Business owners in a close corporation enjoy more freedom over their operations. They can make business decisions such as buying new equipment without seeking the board of directors’ approval.

Cons of Close Corporations

  • Not Widely Recognized: Some states do not allow the formation of close corporations.
  • Taxation: Close corporations are subject to double taxation. However, you can get an S corp tax status to prevent this problem. Also, many close corps don’t pay members dividends to avoid double taxation.
  • Restricted Capital: The capital needed to run a close corporation comes from its owners. Since you can’t publicly sell shares to raise funds, it may limit your ability to expand as a corporation.

8. C Corporation. Best Ownership Style for Raising Business Capital.

A C corp is a publicly traded company that can accommodate unlimited shareholders. Owners can sell their shares on a publicly-traded stock exchange to generate more business funds. C corp is the best option for attracting investors and business capital.

A C corporation taxes shareholders separately from the company. It pays income tax on its corporate profits. Shareholders also pay personal income tax on their dividends. Top companies like Microsoft and Walmart use the C corp designation for federal income tax purposes.

Like other corporation types, a C corp provides shareholders with personal liability protection from business debts and lawsuits . In the event of bankruptcy or debts, shareholders’ assets are untouchable.

Forming a C corp involves:

  • Filling out an article of incorporation document in your state.
  • Appointing a board of directors.
  • Drafting the company’s bylaws.

Pros of C Corporations

  • Access to Funds: A C corporation raises money by selling stock to individuals, companies, and other organizations.
  • Limited Liability: Shareholders are not liable for the corporation’s legal obligations. They enjoy protection on their assets if the company faces a lawsuit or has to pay the business debt.
  • Tax Advantages: This corporation qualifies for many tax advantages, such as personnel and rent tax deductions. The deductions can apply to wages, health, and retirement benefits.

Cons of C Corporations

  • Double Taxation: C corps pay income tax at the federal and state levels on its earnings. Shareholders also have to pay personal income tax on the dividends paid by the corporation. You can escape this problem by reinvesting dividends into the company.
  • High Setup and Running Cost: Running and maintaining a C corporation is not cheap. Corporations are generally expensive to form and run. The average cost of creating a C corporation is around $633. This estimation covers one-time accounting and legal fees.

9. S Corporation. Best Ownership for Small Businesses with Complex Operations.

An S corporation passes its profits and losses directly to its shareholders for tax purposes. It got its name from the Subchapter S of the Internal Revenue Code.

S corp can't have more than 100 shareholders. It can only offer shares to individuals, trusts, and specific tax-exempt organizations. Corporations and partnerships cannot own their shares.

S corps are attractive to small business owners who want to enjoy the benefit of a corporation but want to escape its double taxation. The company does not pay federal and state income taxes. Instead, shareholders pay personal income taxes on their dividends.

Setting up an S corporation requires you to choose a business name, file articles of incorporation, and S-Corp election paperwork with the IRS.

Pros of S Corporations

  • No Double Taxation: Unlike other stock corporations, an S corp does not pay corporate income taxes. However, the IRS mandates that it pays shareholders a reasonable salary even when it doesn’t record a profit. Owners pay personal income tax on their earnings.
  • Limited Liability: Shareholders, directors, and employers enjoy personal liability protection from the corporation’s debts and actions. If creditors sue the corporation, owners’ personal assets have protection.

Cons of S Corporations

  • Limited to Issuing Common Stock: A S corp can only issue common stock that gives shareholders voting powers and ownership rights. It can’t have more than 100 shareholders. This limit can affect its fundraising ability.
  • Expensive to Startup: S corporations are costly to start up and maintain effectively. If you want to start this business ownership, be ready to invest significantly.

10. Cooperative. Best for Individuals and Businesses with Similar Interests.

A cooperative is a privately-owned organization of like-minded business owners that pool resources together for its members’ advantage.

Other business structures allow owners to own a part without using its products. However, with a cooperative, members are its primary customers.

A cooperative is run like a democratic society. Every member actively participates in the decision-making process. They elect officers and members of the board of directors.

Business owners create cooperatives to reduce costs through bulk buys and sharing employees and wages.

Cooperatives can accommodate an unlimited number of shareholders. The minimum number of members it can have varies by country and business type.

Because of its many members, it appoints a board of directors to directly manage its day-to-day running.

A cooperative pays tax like other for-profit business owners but enjoys special tax treatment. It can pay its members patronage dividends to lower its taxable income.

Examples of cooperatives include Sunkist, Ocean Spray, Cabot Creamery, The Associated Press, Home Hardware, and Associated Wholesale Grocers.

Pros of Cooperatives

  • Unity Among Members: Members of a cooperative are united for a common goal. The projects it wants to achieve serve as an anchor that brings all the members as one.
  • Access to Funding: Raising funds and capital to execute projects comes relatively easy. They can raise funds via member contributions and investments. The organization is also liable to receive grants and can house an unlimited number of shareholders.
  • Lower Corporate Tax: A cooperative can get special deductions for expenses. Also, the money it pays members as part of their benefits is free from corporate tax.

Cons of Cooperatives

  • Bureaucracy in Decision-making: Coming to a consensus about decisions is not a walk in the park with cooperatives. Due to multiple shareholders, it's not always possible to have a general agreement.
  • Corruption: If the leaders are corrupt, funds will get misused, resulting in losses for shareholders.

Choose The Best Ownership Type For Your Business

Before choosing the best ownership type for your business, consider the benefits and disadvantages of different options. You have to consider the following factors:

  • Vision: What are your long-term business goals?
  • Mission: What is your business purpose?
  • Size: How many partners or shareholders would you be willing to work with?
  • Expansion Plans: How large or quick do you intend to expand, and what locations do you have in mind?
  • Funds: How do you intend to fund your business?

Answer these questions before making a decision. If you are still having difficulties, consult an attorney for help. However, note that hiring an established business lawyer is costly.

Luckily, there are reliable online legal service providers to help you pick suitable business ownership. In addition, you can get legal assistance to properly file your taxes and set up your business entity.

If you want to learn more about starting and running a profitable new business, here are other Founderjar articles that can help.

  • 5 Common Types of Business Structures (+ Pros & Cons)
  • 13 Best Countries to Start a Business
  • How to Write a Business Plan in 9 Steps (+ Template and Examples)
  • The Best Tools to Start Your Online Business
  • 12 Key Elements of a Business Plan
  • How to Start a Consulting Business in 2023
  • Business Owner Demographics and Statistics in the US
  • C Corp Cost

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Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.

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6 Forms of Business Ownership

Learning objectives, by the end of the chapter, you should be able to:.

  • Identify the questions to ask in choosing the appropriate form of ownership for a business.
  • Describe the sole proprietorship and partnership forms of organization, and specify the advantages and disadvantages.
  • Identify the different types of partnerships, and explain the importance of a partnership agreement.
  • Explain how corporations are formed and how they operate.
  • Discuss the advantages and disadvantages of the corporate form of ownership.
  • Examine special types of business ownership, including limited liability companies, cooperatives, and not-for-profit corporations.
  • Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies.

form of business ownership in business plan

 Show What You Know

The ice cream men.

Who would have thought it? Two ex-hippies with strong interests in social activism would end up starting one of the best-known ice cream companies in the country—Ben & Jerry’s. Perhaps it was meant to be. Ben Cohen (the “Ben” of Ben & Jerry’s) always had a fascination with ice cream. As a child, he made his own mixtures by smashing his favorite cookies and candies into his ice cream.

Ben Cohen and Jerry Greenfield, of Ben and Jerry's ice cream fame, casually dressed in the audience of a theatre

But it wasn’t until his senior year in high school that he became an official “ice cream man,” happily driving his truck through neighborhoods filled with kids eager to buy his ice cream pops. After high school, Ben tried college but it wasn’t for him. He attended Colgate University for a year and a half before he dropped out to return to his real love: being an ice cream man. He tried college again—this time at Skidmore, where he studied pottery and jewelry making—but, in spite of his selection of courses, still didn’t like it.

In the meantime, Jerry Greenfield (the “Jerry” of Ben & Jerry’s) was following a similar path. He majored in pre-med at Oberlin College in the hopes of one day becoming a doctor. But he had to give up on this goal when he was not accepted into medical school. On a positive note, though, his college education steered him into a more lucrative field: the world of ice cream making. He got his first peek at the ice cream industry when he worked as a scooper in the student cafeteria at Oberlin. So, fourteen years after they first met on the junior high school track team, Ben and Jerry reunited and decided to go into ice cream making big time. They moved to Burlington, Vermont—a college town in need of an ice cream parlor—and completed a $5 correspondence course from Penn State on making ice cream. After getting an A in the course—not surprising, given that the tests were open book—they took the plunge: with their life savings of $8,000 and $4,000 of borrowed funds they set up an ice cream shop in a made-over gas station on a busy street corner in Burlington. [1]  The next big decision was which form of business ownership was best for them. This chapter introduces you to their options.

The Canadian Landscape

Innovation, Science and Economic Development Canada (ISED) defines a business based upon the number of paid employees. For this reason, self-employed and “indeterminate” businesses are generally not included in the present publication as they do not have paid employees.

Accordingly, this publication defines an SME (small-to-medium enterprise) as a business establishment with 1–499 paid employees, more specifically:

  • A small business has 1 to 99 paid employees.
  • A medium-sized business has 100 to 499 paid employees.
  • A large business has 500 or more paid employees.

ISED also categorizes businesses with 1-4 employees as micro-enterprises.

“As of December 2015, there were 1.17 million employer businesses in Canada, as shown in Table 1.1-1. Of these, 1.14 million (97.9 percent) businesses were small businesses, 21,415 (1.8 percent) were medium-sized businesses and 2,933 (0.3 percent) were large enterprises.” (Industry Canada)

Charts detailing the number of businesses in each province and territory further categorized by size of businesses based on number of employees. Ontario has 407 174 small businesses, 8 437 medium sized businesses, 1 189 alrge sized businesses for a total of 416 801. For every 1000 inhabitants over the age of 15, Ontario has 36.3 SMEs or small-medium sized enterprises.

Factors to Consider

If you’re starting a new business, you have to decide which legal form of ownership is best for you and your business. Do you want to own the business yourself and operate as a sole proprietorship? Or, do you want to share ownership, operating as a partnership or a corporation? Before we discuss the pros and cons of these three types of ownership, let’s address some of the questions that you’d probably ask yourself in choosing the appropriate legal form for your business.

  • In setting up your business, do you want to minimize the costs of getting started? Do you hope to avoid complex government regulations and reporting requirements?
  • How much control would you like? How much responsibility for running the business are you willing to share? What about sharing the profits?
  • Do you want to avoid special taxes?
  • Do you have all the skills needed to run the business?
  • Are you likely to get along with your co-owners over an extended period of time?
  • Is it important to you that the business survive you?
  • What are your financing needs and how do you plan to finance your company?
  • How much personal exposure to liability are you willing to accept? Do you feel uneasy about accepting personal liability for the actions of fellow owners?

No single form of ownership will give you everything you desire. You’ll have to make some trade-offs. Because each option has both advantages and disadvantages, your job is to decide which one offers the features that are most important to you. In the following sections we’ll compare three ownership options (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and Its Advantages

In a sole proprietorship, y ou make all important decisions and are generally responsible for all day-to-day activities. In exchange for assuming all this responsibility, you get all the income earned by the business. Profits earned are taxed as personal income, so you don’t have to pay any special federal and provincial income taxes.

Disadvantages of Sole Proprietorships

For many people, however, the sole proprietorship is not suitable. The flip side of enjoying complete control is having to supply all the different talents that may be necessary to make the business a success. And when you’re gone, the business dissolves. You also have to rely on your own resources for financing: in effect, you are the business and any money borrowed by the business is loaned to you personally. Even more important, the sole proprietor bears unlimited liability  for any losses incurred by the business. The principle of unlimited personal liability means that if the business incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable. As a sole proprietor, you put your personal assets (your bank account, your car, maybe even your home) at risk for the sake of your business. You can lessen your risk with insurance, yet your liability exposure can still be substantial. Given that Ben and Jerry decided to start their ice cream business together (and therefore the business was not owned by only one person), they could not set their company up as a sole proprietorship.

Partnership

A partnership  (or general partnership) is a business owned jointly by two or more people. About 10 percent of U.S. businesses are partnerships [2]  and though the vast majority are small, some are quite large. For example, the big four public accounting firms, Deloitte, PwC, Ernst & Young, and KPMG, are partnerships. Setting up a partnership is more complex than setting up a sole proprietorship, but it’s still relatively easy and inexpensive. The cost varies according to size and complexity. It’s possible to form a simple partnership without the help of a lawyer or an accountant, though it’s usually a good idea to get professional advice.

Professionals can help you identify and resolve issues that may later create disputes among partners.

Provincial and federal governments also support small businesses and offer free resources as well as opportunities for funding. Canada Business Network  (@canadabusiness #SMEPME) is a collaborative arrangement among federal departments and agencies, provincial and territorial governments and not-for-profit entities.

It offers webinars and other learning events across the country. For example, Ontario’s Small Business Access , offers workshops, a help line, funding, and provides up-to-date information on legal requirements.

The Partnership Agreement

The impact of disputes can be lessened if the partners have executed a well-planned partnership agreement  that specifies everyone’s rights and responsibilities. The agreement might provide such details as the following:

  • Amount of cash and other contributions to be made by each partner
  • Division of partnership income (or loss)
  • Partner responsibilities—who does what
  • Conditions under which a partner can sell an interest in the company
  • Conditions for dissolving the partnership
  • Conditions for settling disputes

Unlimited Liability and the Partnership

A major problem with partnerships, as with sole proprietorships, is unlimited liability : in this case, each partner is personally liable not only for his or her own actions but also for the actions of all the partners. If your partner in an architectural firm makes a mistake that causes a structure to collapse, the loss your business incurs impacts you just as much as it would him or her. And here’s the really bad news: if the business doesn’t have the cash or other assets to cover losses, you can be personally sued for the amount owed. In other words, the party who suffered a loss because of the error can sue you for your personal assets. Many people are understandably reluctant to enter into partnerships because of unlimited liability. Certain forms of businesses allow owners to limit their liability. These include limited partnerships and corporations .

Limited Partnerships

The law permits business owners to form a limited partnership  which has two types of partners: a single general partner who runs the business and is responsible for its liabilities, and any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.

Advantages and Disadvantages of Partnerships

The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business. Second, it makes financing easier: the business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Finally, continuity needn’t be an issue because partners can agree legally to allow the partnership to survive if one or more partners die.

Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Second, being a partner means that you have to share decision making, and many people aren’t comfortable with that situation. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of jeopardizing the continuance of the business. Third, in addition to sharing ideas, partners also share profits. This arrangement can work as long as all partners feel that they’re being rewarded according to their efforts and accomplishments, but that isn’t always the case. While the partnership form of ownership is viewed negatively by some, it was particularly appealing to Ben Cohen and Jerry Greenfield. Starting their ice cream business as a partnership was inexpensive and let them combine their limited financial resources and use their diverse skills and talents. As friends they trusted each other and welcomed shared decision making and profit sharing. They were also not reluctant to be held personally liable for each other’s actions.

Corporation

A corporation  (sometimes called a regular or C-corporation) differs from a sole proprietorship and a partnership because it’s a legal entity that is entirely separate from the parties who own it. It can enter into binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and be taxed. Once businesses reach any substantial size, it is advantageous to organize as a corporation so that its owners can limit their liability. Corporations, then, tend to be far larger, on average, than businesses using other forms of ownership.  Most large well-known businesses are corporations, but so are many of the smaller firms with which likely you do business.

Ownership and Stock

Corporations are owned by shareholders  who invest money in the business by buying shares of stock . The portion of the corporation they own depends on the percentage of stock they hold. For example, if a corporation has issued 100 shares of stock, and you own 30 shares, you own 30 percent of the company. The shareholders elect a board of directors , a group of people (primarily from outside the corporation) who are legally responsible for governing the corporation. The board oversees the major policies and decisions made by the corporation, sets goals and holds management accountable for achieving them, and hires and evaluates the top executive, generally called the CEO ( chief executive officer ). The board also approves the distribution of income to shareholders in the form of cash payments called dividends.

Benefits of Incorporation

The corporate form of organization offers several advantages, including limited liability for shareholders, greater access to financial resources, specialized management, and continuity.

Limited Liability

The most important benefit of incorporation is the limited liability  to which shareholders are exposed: they are not responsible for the obligations of the corporation, and they can lose no more than the amount that they have personally invested in the company. Limited liability would have been a big plus for the unfortunate individual whose business partner burned down their dry cleaning establishment. Had they been incorporated, the corporation would have been liable for the debts incurred by the fire. If the corporation didn’t have enough money to pay the debt, the individual shareholders would not have been obligated to pay anything. They would have lost all the money that they’d invested in the business, but no more.

Financial Resources

Incorporation also makes it possible for businesses to raise funds by selling stock. This is a big advantage as a company grows and needs more funds to operate and compete. Depending on its size and financial strength, the corporation also has an advantage over other forms of business in getting bank loans. An established corporation can borrow its own funds, but when a small business needs a loan, the bank usually requires that it be guaranteed by its owners.

Specialized Management

Because of their size and ability to pay high sales commissions and benefits, corporations are generally able to attract more skilled and talented employees than are proprietorships and partnerships.

Continuity and Transferability

Another advantage of incorporation is continuity . Because the corporation has a legal life separate from the lives of its owners, it can (at least in theory) exist forever.

Transferring ownership of a corporation is easy: shareholders simply sell their stock to others. Some founders, however, want to restrict the transferability of their stock and so choose to operate as a privately-held corporation. The stock in these corporations is held by only a few individuals, who are not allowed to sell it to the general public.

Companies with no such restrictions on stock sales are called public corporations; stock is available for sale to the general public.

Drawbacks to Incorporation

Like sole proprietorships and partnerships, corporations have both positive and negative aspects. In sole proprietorships and partnerships, for instance, the individuals who own and manage a business are the same people. Corporate managers, however, don’t necessarily own stock, and shareholders don’t necessarily work for the company. This situation can be troublesome if the goals of the two groups differ significantly.

Managers, for example, are often more interested in career advancement than the overall profitability of the company. Stockholders might care more about profits without regard for the well-being of employees. This situation is known as the agency problem , a conflict of interest inherent in a relationship in which one party is supposed to act in the best interest of the other. It is often quite difficult to prevent self-interest from entering into these situations.

Another drawback to incorporation—one that often discourages small businesses from incorporating—is the fact that corporations are more costly to set up. When you combine filing and licensing fees with accounting and attorney fees, incorporating a business could set you back by $1,000 to $6,000 or more depending on the size and scope of your business. [3]   Additionally, corporations are subject to levels of regulation and governmental oversight that can place a burden on small businesses. Finally, corporations are subject to what’s generally called “ double taxation .” Corporations are taxed by the federal and provincial governments on their earnings. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends. Corporate profits are thus taxed twice—the corporation pays the taxes the first time and the shareholders pay the taxes the second time.

The Canadian Comparison

“Incorporation: Tax savings, but more paperwork”, a 2017 article in The Globe and Mail, puts incorporation in to the Canadian perspective:

In Ontario, an incorporated business pays a tax rate of 15 per cent on the first $500,000 of income each year, thanks to the small business tax deduction, and 26.5 per cent for anything beyond that. Rates vary by province. A lower tax rate is one of the key advantages to incorporating a business. However, accountants make the distinction that the taxes aren’t being saved, but instead deferred. That’s because, when the money is taken out of the corporation for personal use, through salary or dividends, the individual winds up paying approximately the same tax rate as if they were a sole proprietor. It’s known as the “theory of integration” in the Canadian tax system.

Most accountants recommend business owners incorporate if they can afford to leave money in the company longer-term with the goal of watching the value of the assets grow.

Another tax advantage comes when it’s time to sell the business. The shares of most Canadian private corporations are eligible for a lifetime capital-gains exemption. In 2016, that exemption amounts to the first $824,176 of capital gains from personal income tax, per shareholder. If the business were a sole proprietorship, any gain from the sale of a private corporation would be taxed.

Another advantage to incorporating is the opportunity to use income splitting among family members. If one spouse makes more money, you can income-split. Over all, both spouses will be in a lower income-tax bracket.

Another advantage of incorporation, beyond taxes, is the ability to shift liability to the corporation and away from the individual. Incorporating can also add credibility; some larger companies require contractors to be incorporated before they can be hired.

The disadvantages to incorporation are increased paperwork and administration. That includes the one-time cost to set up the corporation, including accounting and legal fees, which can run to more than $1,000. Owners also have to file two tax returns, a personal one and a more complicated one for the business.

Five years after starting their ice cream business, Ben Cohen and Jerry Greenfield evaluated the pros and cons of the corporate form of ownership, and the “pros” won. The primary motivator was the need to raise funds to build a $2 million manufacturing facility. Not only did Ben and Jerry decide to switch from a partnership to a corporation, but they also decided to sell shares of stock to the public (and thus become a public corporation). Their sale of stock to the public was a bit unusual: Ben and Jerry wanted the community to own the company, so instead of offering the stock to anyone interested in buying a share, they offered stock to residents of Vermont only. Ben believed that “business has a responsibility to give back to the community from which it draws its support”. [4]  He wanted the company to be owned by those who lined up in the gas station to buy cones. The stock was so popular that one in every hundred Vermont families bought stock in the company. [5]  Eventually, as the company continued to expand, the stock was sold on a national level.

Other Types of Business Ownership

In addition to the three commonly adopted forms of business organization—sole proprietorship, partnership, and regular corporations—some business owners select other forms of organization to meet their particular needs. We’ll look at several of these options:

  • Limited liability companies

Cooperatives

  • Not-for-profit corporations

Limited Liability Companies

How would you like a legal form of organization that provides the attractive features of the three common forms of organization (corporation, sole proprietorship and partnership) and avoids the unattractive features of these three organization forms? The limited liability company (LLC)  accomplishes exactly that. This form provides business owners with limited liability (a key advantage of corporations) and no “double taxation” (a key advantage of sole proprietorships and partnerships). Let’s look at the LLC in more detail.

In 1977, Wyoming became the first state to allow businesses to operate as limited liability companies. Twenty years later, in 1997, Hawaii became the last state to give its approval to the new organization form. Since then, the limited liability company has increased in popularity. Its rapid growth was fueled in part by changes in state statutes that permit a limited liability company to have just one member. The trend to LLCs can be witnessed by reading company names on the side of trucks or on storefronts in your city. It is common to see names such as Jim Evans Tree Care, LLC, and For-Cats-Only Veterinary Clinic, LLC. But LLCs are not limited to small businesses. Companies such as Crayola, Domino’s Pizza, Ritz-Carlton Hotel Company, and iSold It (which helps people sell their unwanted belongings on eBay) are operating under the limited liability form of organization. In a limited liability company, owners (called members rather than shareholders) are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level (thereby eliminating double taxation).

We have touted the benefits of limited liability protection for an LLC. We now need to point out some circumstances under which an LLC member (or a shareholder in a corporation) might be held personally liable for the debts of his or her company. A business owner can be held personally liable if he or she:

  • Personally guarantees a business debt or bank loan which the company fails to pay.
  • Fails to pay employment taxes to the government.
  • Engages in fraudulent or illegal behavior that harms the company or someone else.
  • Does not treat the company as a separate legal entity, for example, uses company assets for personal uses.

Sunny day outside a corner shot of the exterior of Mountain Equipment Co-op in Ottawa

A cooperative  (also known as a co-op) is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members. If run correctly, cooperatives increase profits for its producer-members and lower costs for its consumer-members. Cooperatives are fairly common in the agricultural community. For example, some 750 cranberry and grapefruit member growers market their cranberry sauce, fruit juices, and dried cranberries through the Ocean Spray Cooperative. [6]  More than three hundred thousand farmers obtain products they need for production—feed, seed, fertilizer, farm supplies, fuel—through the Southern States Cooperative. [7]  Co-ops also exist outside agriculture. For example, MEC (Mountain Equipment  Co-op), which sells quality outdoor gear, has more than 5 million members across the country, who have each paid $5 for their lifetime memberships.The company shares its financial success with its members and also gives back 1% of its sales to maintain participation in the outdoors.

Not-for-Profit Corporations

A not-for-profit corporation  (sometimes called a nonprofit) is an organization formed to serve some public purpose rather than for financial gain. As long as the organization’s activity is for charitable, religious, educational, scientific, or literary purposes, it can be exempt  from paying income taxes. Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions. The types of groups that normally apply for nonprofit status vary widely and include churches, synagogues, mosques, and other places of worship; museums; universities; and conservation groups.

Since Statistics Canada ended its deep collection of nonprofit statistics in 2008, the most recent data available is:

  • 170,000 charitable and non profit organizations in Canada
  • 85,000 of these are registered charities (recognized by the Canada Revenue Agency).
  • The charitable and nonprofit sector contributes an average of 8.1% of total Canadian GDP, more than the retail trade industry and close to the value of the mining, oil and gas extraction industry  
  • Two million Canadians are employed in the charitable and nonprofit sector  
  • Over 13 million people volunteer for charities and nonprofits

Do you think these numbers have increased or decreased over the last decade? Why?

Mergers and Acquisitions

form of business ownership in business plan

If you do not see the embedded match game, access it: https://quizlet.com/274512349/match .

The headline read, “Wanted: More than 2,000 in Google hiring spree”. [8]  The largest Web search engine in the world was disclosing its plans to grow internally and increase its workforce by more than 2,000 people, with half of the hires coming from the United States and the other half coming from other countries. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.

An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 + 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.

Though they are often used as if they’re synonymous, the terms merger and acquisition mean slightly different things. A merger  occurs when two companies combine to form a new company. An acquisition  is the purchase of one company by another.

In June 2013, Shoppers Drug Mart, Canada’s biggest pharmacy chain merged with Loblaw, Canada’s largest grocery retailer, in a 12.4 billion dollar deal. Rather than cutting into each other’s market share, the deal allows the two companies to play on each other’s strengths. Shoppers has about $1 billion in food sales annually, versus Loblaw’s $30 billion. But Loblaw’s share of the pharmacy market is only five per cent, so adding Shoppers health products and services to Loblaw grocery stores allows the food retailer to expand its services in what it sees as a growing sector: health, wellness and nutrition. ( www.cbc.ca ). Contrast this merger with an acquisition in that same year. Sobey’s acquired 200 Safeway stores in Western Canada under a 5.8 billion dollar deal. According to news reports, along with 213 Safeway grocery stores — more than 60 percent of which are in Calgary, Vancouver, Edmonton and Winnipeg — Sobeys will also acquire:

  • 199 in-store pharmacies;
  • 62 gas stations;
  • 10 liquor stores;
  • 4 primary distribution centres and a related wholesale business; and
  • 12 manufacturing facilities.

Sobeys will also get $1.8 billion worth of real estate in the deal.

Another example of an acquisition is the purchase of Reebok by Adidas for $3.8 billion. [9]  The deal was expected to give Adidas a stronger presence in North America and help the company compete with rival Nike. Once this acquisition was completed, Reebok as a company ceased to exist, though Adidas still sells shoes under the Reebok brand.

Motives Behind Mergers and Acquisitions

Companies are motivated to merge or acquire other companies for a number of reasons, including the following.

Gain Complementary Products

  • Shoppers Drug Mart began to sell President’s Choice products in its merger with Loblaw.
  • Loblaw is able to add Shoppers health care products to its shelves.
  • Sobey’s gains Safeway’s gas stations and liquors stores in its acquisition.

Attain New Markets or Distribution Channels

  • Sobey’s acquired access to 12 manufacturing facilities, 4 distribution centres, and a related wholesale business.
  • Loblaw increases access to urban centres where Shoppers are already located, bringing a wider variety of products to customers in densely populated areas.

Realize Synergies

  • Integration of the companies’ loyalty programs will provide the two with a vast knowledge base of consumers’ buying habits and provide economies of scale — which, the companies estimate, will translate into savings of about $300 million annually.
  • Loblaw’s share of the pharmacy market is only five per cent so adding Shoppers health products and services to its grocery stores will allow the food retailer to expand its services in what it sees as a growing sector: health, wellness and nutrition.

The Less-Friendly Option

Hostile takeovers: ben and je rry’s.

What happens, though, if one company wants to acquire another company, but that company doesn’t want to be acquired? The outcome could be a hostile takeover —an act of assuming control that’s resisted by the targeted company’s management and its board of directors. Ben Cohen and Jerry Greenfield, the Ice Cream Men from above, found themselves in one of these situations: Unilever—a very large Dutch/British company that owns three ice cream brands—wanted to buy Ben & Jerry’s, against the founders’ wishes. Most of the Ben & Jerry’s stockholders sided with Unilever. They had little confidence in the ability of Ben Cohen and Jerry Greenfield to continue managing the company and were frustrated with the firm’s social-mission focus. The stockholders liked Unilever’s offer to buy their Ben & Jerry’s stock at almost twice its current market price and wanted to take their profits. In the end, Unilever won; Ben & Jerry’s was acquired by Unilever in a hostile takeover. [10]  Despite fears that the company’s social mission would end, it didn’t happen. Though neither Ben Cohen nor Jerry Greenfield are involved in the current management of the company, they have returned to their social activism roots and are heavily involved in numerous social initiatives sponsored by the company.

Solidifying the Vocabulary

Use this quick activity to ensure you understand the vocabulary related to mergers and acquisitions.

Key Takeaways

Important terms and concepts.

  • Advantages include: complete control for the owner, easy and inexpensive to form, and owner gets to keep all of the profits.
  • Disadvantages include: unlimited liability for the owner, complete responsibility for talent and financing, and business dissolves if the owner dies.
  • Advantages include: more resources and talents come with an increase in partners, and the business can continue even after the death of a partner.
  • Disadvantages include: partnership disputes, unlimited liability, and shared profits.
  • A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.
  • Advantages include: limited liability, easier access to financing, and unlimited life for the corporation.
  • Disadvantages include: the agency problem, double taxation, and incorporation expenses and regulations.
  • A limited liability company (LLC) is similar to an C-corporation, but it has fewer rules and restrictions than an C-corporation. For example, an LLC can have any number of members.
  • A cooperative is a business owned and controlled by those who use its services. Individuals and firms who belong to the cooperative join together to market products, purchase supplies, and provide services for its members.
  • A not-for-profit corporation is an organization formed to serve some public purpose rather than for financial gain. It enjoys favorable tax treatment.
  • A merger occurs when two companies combine to form a new company.
  • An acquisition is the purchase of one company by another with no new company being formed. A hostile takeover occurs when a company is purchased even though the company’s management and Board of Directors do not want to be acquired.

Fundamentals of Business: Canadian Edition Copyright © 2018 (Canadian Edition) by Pamplin College of Business and Virgina Tech Libraries is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Writing the Organization and Management Section of Your Business Plan

What is the organization and management section in a business plan.

  • What to Put in the Organization and Management Section

Organization

The management team, helpful tips to write this section, frequently asked questions (faqs).

vm / E+ / Getty Images

Every business plan needs an organization and management section. This document will help you convey your vision for how your business will be structured. Here's how to write a good one.

Key Takeaways

  • This section of your business plan details your corporate structure.
  • It should explain the hierarchy of management, including details about the owners, the board of directors, and any professional partners.
  • The point of this section is to clarify who will be in charge of each aspect of your business, as well as how those individuals will help the business succeed.

The organization and management section of your business plan should summarize information about your business structure and team. It usually comes after the market analysis section in a business plan . It's especially important to include this section if you have a partnership or a multi-member limited liability company (LLC). However, if you're starting a home business or are  writing  a business plan for one that's already operating, and you're the only person involved, then you don't need to include this section.

What To Put in the Organization and Management Section

You can separate the two terms to better understand how to write this section of the business plan.

The "organization" in this section refers to how your business is structured and the people involved. "Management" refers to the responsibilities different managers have and what those individuals bring to the company.

In the opening of the section, you want to give a summary of your management team, including size, composition, and a bit about each member's experience.

For example, you might write something like "Our management team of five has more than 20 years of experience in the industry."

The organization section sets up the hierarchy of the people involved in your business. It's often set up in a chart form. If you have a partnership or multi-member LLC, this is where you indicate who is president or CEO, the CFO, director of marketing, and any other roles you have in your business. If you're a single-person home business, this becomes easy as you're the only one on the chart.

Technically, this part of the plan is about owner members, but if you plan to outsource work or hire a virtual assistant, you can include them here, as well. For example, you might have a freelance webmaster, marketing assistant, and copywriter. You might even have a virtual assistant whose job it is to work with your other freelancers. These people aren't owners but have significant duties in your business.

Some common types of business structures include sole proprietorships, partnerships, LLCs, and corporations.

Sole Proprietorship

This type of business isn't a separate entity. Instead, business assets and liabilities are entwined with your personal finances. You're the sole person in charge, and you won't be allowed to sell stock or bring in new owners. If you don't register as any other kind of business, you'll automatically be considered a sole proprietorship.

Partnership

Partnerships can be either limited (LP) or limited liability (LLP). LPs have one general partner who takes on the bulk of the liability for the company, while all other partner owners have limited liability (and limited control over the business). LLPs are like an LP without a general partner; all partners have limited liability from debts as well as the actions of other partners.

Limited Liability Company

A limited liability company (LLC) combines elements of partnership and corporate structures. Your personal liability is limited, and profits are passed through to your personal returns.

Corporation

There are many variations of corporate structure that an organization might choose. These include C corps, which allow companies to issue stock shares, pay corporate taxes (rather than passing profits through to personal returns), and offer the highest level of personal protection from business activities. There are also nonprofit corporations, which are similar to C corps, but they don't seek profits and don't pay state or federal income taxes.

This section highlights what you and the others involved in the running of your business bring to the table. This not only includes owners and managers but also your board of directors (if you have one) and support professionals. Start by indicating your business structure, and then list the team members.

Owner/Manager/Members

Provide the following information on each owner/manager/member:

  • Percentage of ownership (LLC, corporation, etc.)
  • Extent of involvement (active or silent partner)
  • Type of ownership (stock options, general partner, etc.)
  • Position in the business (CEO, CFO, etc.)
  • Duties and responsibilities
  • Educational background
  • Experience or skills that are relevant to the business and the duties
  • Past employment
  • Skills will benefit the business
  • Awards and recognition
  • Compensation (how paid)
  • How each person's skills and experience will complement you and each other

Board of Directors

A board of directors is another part of your management team. If you don't have a board of directors, you don't need this information. This section provides much of the same information as in the ownership and management team sub-section. 

  • Position (if there are positions)
  • Involvement with the company

Even a one-person business could benefit from a small group of other business owners providing feedback, support, and accountability as an advisory board. 

Support Professionals

Especially if you're seeking funding, let potential investors know you're on the ball with a lawyer, accountant, and other professionals that are involved in your business. This is the place to list any freelancers or contractors you're using. Like the other sections, you'll want to include:

  • Background information such as education or certificates
  • Services provided to your business
  • Relationship information (retainer, as-needed, regular, etc.)
  • Skills and experience making them ideal for the work you need
  • Anything else that makes them stand out as quality professionals (awards, etc.)

Writing a business plan seems like an overwhelming activity, especially if you're starting a small, one-person business. But writing a business plan can be fairly simple.

Like other parts of the business plan, this is a section you'll want to update if you have team member changes, or if you and your team members receive any additional training, awards, or other resume changes that benefit the business.

Because it highlights the skills and experience you and your team offer, it can be a great resource to refer to when seeking publicity and marketing opportunities. You can refer to it when creating your media kit or pitching for publicity.

Why are organization and management important to a business plan?

The point of this section is to clarify who's in charge of what. This document can clarify these roles for yourself, as well as investors and employees.

What should you cover in the organization and management section of a business plan?

The organization and management section should explain the chain of command , roles, and responsibilities. It should also explain a bit about what makes each person particularly well-suited to take charge of their area of the business.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

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Lesson Plan: Forms of Business Ownership

Description.

In this lesson, students will learn to describe and contrast different forms of business ownership.

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How to Start a Business: A Comprehensive Guide and Essential Steps

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Conducting Market Research

Crafting a business plan, reviewing funding options, understanding legal requirements, implementing marketing strategies, how much does it cost to start a business, what should i do before starting a business, what types of funding are available to start a business, do you need to write a business plan, the bottom line.

Building an effective business launch plan

form of business ownership in business plan

Starting a business in the United States involves a number of different steps, spanning legal considerations, market research, creating a business plan, securing funding, and developing a marketing strategy. It also entails decisions around a business’s location, structure, name, taxation, and registration.

This article covers the key steps involved in starting a business, as well as important aspects of the process for entrepreneurs to consider.

Key Takeaways

  • Entrepreneurs seeking to develop their own business should start by conducting market research to understand their industry space and competition, and to target customers.
  • The next step is to write a comprehensive business plan, outlining the company’s structure, vision, and strategy. Potential funders and partners may want to review the business plan in advance of signing any agreements.
  • Securing funding is crucial in launching a business. Funding can come in the form of grants, loans, venture capital, or crowdfunded money; entrepreneurs may also opt to self-fund instead of or in combination with any of these avenues.
  • Choosing a location and business structure can have many implications for legal aspects of business ownership, such as taxation, registration, and permitting, so it’s important to fully understand the regulations and requirements for the jurisdiction in which the business will operate. 
  • Another key aspect of launching a new business is having a strategic marketing plan that addresses the specifics of the business, industry, and target market.

Before starting a business, entrepreneurs should conduct market research to determine their target audience, competition, and market trends. 

The U.S. Small Business Administration (SBA) recommends researching demographic data around potential customers to understand a given consumer base and reduce business risk. It also breaks down common market considerations as follows:

  • Demand : Do people want or need this product or service?
  • Market size : How many people might be interested?
  • Economic indicators : These include income, employment rate, and spending habits of potential customers.
  • Location : Where are the target market and the business located?
  • Market saturation : How competitive is the business space, and how many similar offerings exist?
  • Pricing : What might a customer be willing to pay?

Market research should also include an analysis of the competition (including their strengths and weaknesses compared to those of the proposed business), market opportunities and barriers to entry, industry trends, and competitors’ market share .

There are various methods for conducting market research, and the usefulness of different sources and methodologies will depend on the nature of the industry and potential business. Data can come from a variety of sources: statistical agencies, economic and financial institutions, and industry sources, as well as direct consumer research through focus groups, interviews, surveys, or questionnaires.

A comprehensive business plan is like a blueprint for a business. It will help lay the foundation for business development and can assist in decision making, day-to-day operations, and growth. 

Potential investors or business partners may want to review and assess a business plan in advance of agreeing to work together. Financial institutions often request business plans as part of an application for a loan or other forms of capital. 

Business plans will differ according to the needs and nature of the company and only need to include what makes sense for the business in question. As such, they can vary in length and structure depending on their intended purpose. 

Business plans can generally be divided into two formats: traditional business plans and lean startup business plans. The latter is typically more useful for businesses that will need to adjust their planning quickly and frequently, as they are shorter and provide a higher-level overview of the company.

The process of funding a business can be as unique as the business itself—that is, it will depend on the needs and vision of the business and the current financial situation of the business owner. 

The first step in seeking funding is to calculate how much it will cost to start the business. Estimate startup costs by identifying a list of expenses and putting a number to each of them through research and requesting quotes. The SBA has a startup costs calculator for small businesses that includes common types of business expenses. 

From there, an entrepreneur will need to determine how to secure the required funding. Common funding methods include:

  • Self-funding , also known as bootstrapping  
  • Seeking funding from investors, also known as venture capital  
  • Raising money by crowdfunding
  • Securing a business loan
  • Winning a business grant

Each method will hold advantages and disadvantages depending on the situation of the business. It’s important to consider the obligations associated with any avenue of funding. For example, investors generally provide funding in exchange for a degree of ownership or control in the company, whereas self-funding may allow business owners to maintain complete control (albeit while taking on all of the risk). 

The availability of funding sources is another potential consideration. Unlike loans, grants do not have to be paid back—however, as a result, they are a highly competitive form of business funding. The federal government also does not provide grants for the purposes of starting or growing a business, although private organizations may. On the other hand, the SBA guarantees several categories of loans to support small business owners in accessing capital that may not be available through traditional lenders.

Whichever funding method (or methods) an entrepreneur decides to pursue, it’s essential to evaluate in detail how the funding will be used and lay out a future financial plan for the business, including sales projections and loan repayments , as applicable.  

Legally, businesses operating in the U.S. are subject to regulations and requirements under many jurisdictions, across local, county, state, and federal levels. Legal business requirements are often tied to the location and structure of the business, which then determine obligations around taxation, business IDs, registration, and permits.

Choosing a Business Location

The location—that is, the neighborhood, city, and state—in which a business operates will have an impact on many different aspects of running the business, such as the applicable taxes, zoning laws (for brick-and-mortar, or physical locations), and regulations.

A business needs to be registered in a certain location; this location then determines the taxes, licenses, and permits required. Other factors to consider when choosing a location might include:

  • Human factors : Such as the target audience for your business, and preferences of business owners and partners around convenience, knowledge of the area, and commuting distance
  • Regulations and restrictions : Concerning applicable jurisdictions or government agencies, including zoning laws
  • Regionally specific expenses : Such as average salaries (including required minimum wages), property or rental prices, insurance rates, utilities, and government fees and licensing
  • The tax and financial environment : Including income tax, sales tax, corporate tax, and property tax, or the availability of tax credits, incentives, or loan programs

Picking a Business Structure

The structure of a business should reflect the desired number of owners, liability characteristics, and tax status. Because these have legal and tax compliance implications , it’s important to fully understand and choose a business structure carefully and, if necessary, consult a business counselor, lawyer, and/or accountant.

Common business structures include:

  • Sole proprietorship : An unincorporated business that has just one owner, who pays personal income tax on profits
  • Partnership : Options include a limited partnership (LP) or a limited liability partnership (LLP)
  • Limited liability company (LLC) : A business structure that protects its owners from personal responsibility for its debts or liabilities
  • Corporation : Options include a C corp , S corp , B corp , closed corporation , or nonprofit

Getting a Tax ID Number

A tax ID number is like a Social Security number for a business. Whether or not a state and/or federal tax ID number is required for any given business will depend on the nature of the business, as well as the location in which the business is registered.

If a business is required to pay state taxes (such as income taxes and employment taxes), then a state tax ID will be necessary. The process and requirements around state tax IDs vary by state and can be found on individual states’ official websites. In some situations, state tax IDs can also be used for other purposes, such as protecting sole proprietors against identity theft.

A federal tax ID, also known as an employer identification number (EIN) , is required if a business:

  • Operates as a corporation or partnership
  • Pays federal taxes
  • Wants to open a business bank account
  • Applies for federal business licenses and permits
  • Files employment, excise, alcohol, tobacco, or firearms tax returns

There are further situations in which a business might need a federal tax ID number, specific to income taxation, certain types of pension plans, and working with certain types of organizations. Business owners can check with the Internal Revenue Service (IRS) about whether they need an EIN.

Registering a Business

Registration of a business will depend on its location and business structure, and can look quite different depending on the nature and size of the business. 

For example, small businesses may not require any steps beyond registering their business name with local and state governments, and business owners whose business name is their own legal name might not need to register at all. However, registration can include personal liability protection as well as legal and tax benefits, so it can be beneficial even if it’s not strictly required. 

Most LLCs, corporations, partnerships, and nonprofits are required to register at the state level and will require a registered agent to file on their behalf. Determining which state to register with can depend on factors such as:

  • Whether the business has a physical presence in the state
  • If the business often conducts in-person client meetings in the state
  • If a large portion of business revenue comes from the state
  • Whether the business has employees working in the state

If a business operates in more than one state, it may need to file for foreign qualification in other states in which it conducts business. In this case, the business would register in the state in which it was formed (this would be considered the domestic state), and file for foreign qualification in any additional states.

Some businesses may decide to register with the federal government if they are seeking tax-exempt status or trademark protection, but federal registration is not required for many businesses.

Overall registration requirements, costs, and documentation will vary depending on the governing jurisdictions and business structure.

Obtaining Permits

Filing for the applicable government licenses and permits will depend on the industry and nature of the business, and might include submitting an application to a federal agency, state, county, and/or city. The SBA lists federally regulated business activities alongside the corresponding license-issuing agency, while state, county, and city regulations can be found on the official government websites for each region.

Every business should have a marketing plan that outlines an overall strategy and the day-to-day tactics used to execute it. A successful marketing plan will lay out tactics for how to connect with customers and convince them to buy what the company is selling. 

Marketing plans will vary according to the specifics of the industry , target market, and business, but they should aim to include descriptions of and strategies around the following:

  • A target customer : Including market size, demographics, traits, and relevant trends
  • Unique value propositions or business differentiators : Essentially, an overview of the company’s competitive advantage with regard to employees, certifications, or offerings
  • A sales and marketing plan : Including methods, channels, and a customer’s journey through interacting with the business
  • Goals : Should cover different aspects of the marketing and sales strategy, such as social media follower growth, public relations opportunities, or sales targets
  • An execution plan : Should detail tactics and break down higher-level goals into specific actions
  • A budget : Detailing how much different marketing projects and activities will cost

The startup costs for any given business will vary greatly depending on the industry, business activity, and product or service offering. Home-based online businesses will usually cost less than those that require an office setting to meet with customers. The estimated cost can be calculated by first identifying a list of expenses and then researching and requesting quotes for each one. Use the SBA’s startup costs calculator for common types of expenses associated with starting a small business.

Entrepreneurs seeking to start their own business should fully research and understand all the legal and funding considerations involved, conduct market research, and create marketing and business plans. They will also need to secure any necessary permits, licenses, funding, and business bank accounts.

Startup capital can come in the form of loans, grants, crowdfunding, venture capital, or self-funding. Note that the federal government does not provide grant funding for the purposes of starting a business, although private sources do.

Business plans are comprehensive documents that lay out the most important information about a business. They are important references for the growth, development, and decision-making processes of a business, and financial institutions as well as potential investors and partners generally request to review them in advance of agreeing to provide funding or work together.

Starting a business is no easy feat, but research and preparation can help smooth the way. Having a firm understanding of the target market, competition, industry, business goals, business structure, funding requirements, tax and operating regulations, and marketing strategy, and conducting research and consulting experts where necessary, are all things that entrepreneurs can do to set themselves up for success.

U.S. Small Business Administration. “ Market Research and Competitive Analysis .”

U.S. Small Business Administration. “ Write Your Business Plan .”

U.S. Small Business Administration. “ Loans .”

U.S. Small Business Administration. “ Fund Your Business .”

U.S. Small Business Administration. “ Pick Your Business Location .”

U.S. Small Business Administration. “ Choose a Business Structure .”

U.S. Small Business Administration. “ Get Federal and State Tax ID Numbers .”

Internal Revenue Service. “ Do You Need an EIN? ”

U.S. Small Business Administration. “ Register Your Business .”

U.S. Small Business Administration. “ Apply for Licenses and Permits .”

U.S. Small Business Administration. “ Marketing and Sales .”

U.S. Small Business Administration. “ Grants .”

  • How to Start a Business: A Comprehensive Guide and Essential Steps 1 of 25
  • How to Do Market Research, Types, and Example 2 of 25
  • Marketing Strategy: What It Is, How It Works, and How to Create One 3 of 25
  • Marketing in Business: Strategies and Types Explained 4 of 25
  • What Is a Marketing Plan? Types and How to Write One 5 of 25
  • Business Development: Definition, Strategies, Steps & Skills 6 of 25
  • Business Plan: What It Is, What's Included, and How to Write One 7 of 25
  • Small Business Development Center (SBDC): Meaning, Types, Impact 8 of 25
  • How to Write a Business Plan for a Loan 9 of 25
  • Business Startup Costs: It’s in the Details 10 of 25
  • Startup Capital Definition, Types, and Risks 11 of 25
  • Bootstrapping Definition, Strategies, and Pros/Cons 12 of 25
  • Crowdfunding: What It Is, How It Works, and Popular Websites 13 of 25
  • Starting a Business with No Money: How to Begin 14 of 25
  • A Comprehensive Guide to Establishing Business Credit 15 of 25
  • Equity Financing: What It Is, How It Works, Pros and Cons 16 of 25
  • Best Startup Business Loans 17 of 25
  • Sole Proprietorship: What It Is, Pros and Cons, and Differences From an LLC 18 of 25
  • Partnership: Definition, How It Works, Taxation, and Types 19 of 25
  • What is an LLC? Limited Liability Company Structure and Benefits Defined 20 of 25
  • Corporation: What It Is and How to Form One 21 of 25
  • Starting a Small Business: Your Complete How-to Guide 22 of 25
  • Starting an Online Business: A Step-by-Step Guide 23 of 25
  • How to Start Your Own Bookkeeping Business: Essential Tips 24 of 25
  • How to Start a Successful Dropshipping Business: A Comprehensive Guide 25 of 25

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Chapter 6 Forms of Business Ownership

Learning objectives.

  • Identify the questions to ask in choosing the appropriate form of ownership for a business.
  • Describe the sole proprietorship and partnership forms of organization, and specify the advantages and disadvantages.
  • Identify the different types of partnerships, and explain the importance of a partnership agreement.
  • Explain how corporations are formed and how they operate.
  • Discuss the advantages and disadvantages of the corporate form of ownership.
  • Examine special types of business ownership, including limited-liability companies and not-for-profit corporations.
  • Define mergers and acquisitions, and explain why companies are motivated to merge or acquire other companies.

The Ice Cream Men

Who would have thought it? Two ex-hippies with strong interests in social activism would end up starting one of the best-known ice cream companies in the country—Ben & Jerry’s. Perhaps it was meant to be. Ben Cohen (the “Ben” of Ben & Jerry’s) always had a fascination with ice cream. As a child, he made his own mixtures by smashing his favorite cookies and candies into his ice cream. But it wasn’t until his senior year in high school that he became an official “ice cream man,” happily driving his truck through neighborhoods filled with kids eager to buy his ice cream pops. After high school, Ben tried college but it wasn’t for him. He attended Colgate University for a year and a half before he dropped out to return to his real love: being an ice cream man. He tried college again—this time at Skidmore, where he studied pottery and jewelry making—but, in spite of his selection of courses, still didn’t like it.

Ben and Jerry sit at a table and are talking. Both are in dark gray sweaters. Icecream pints are on the table in front of them, as well as a blue coffee mug.

In the meantime, Jerry Greenfield (the “Jerry” of Ben & Jerry’s) was following a similar path. He majored in pre-med at Oberlin College in the hopes of one day becoming a doctor. But he had to give up on this goal when he was not accepted into medical school. On a positive note, though, his college education steered him into a more lucrative field: the world of ice cream making. He got his first peek at the ice cream industry when he worked as a scooper in the student cafeteria at Oberlin. So, 14 years after they first met on the junior high school track team, Ben and Jerry reunited and decided to go into ice cream making big time. They moved to Burlington, Vermont—a college town in need of an ice cream parlor—and completed a $5 correspondence course from Penn State on making ice cream. After getting an A in the course—not surprising, given that the tests were open book—they took the plunge: with their life savings of $8,000 and $4,000 of borrowed funds they set up an ice cream shop in a made-over gas station on a busy street corner in Burlington. [1] The next big decision was which form of business ownership was best for them. This chapter introduces you to their options.

Factors to Consider

If you’re starting a new business, you have to decide which legal form of ownership is best for you and the strategy you plan on pursuing. Do you want to own the business yourself and operate as a sole proprietorship? Or, do you want to share ownership, operating as a partnership or a corporation? Before we discuss the pros and cons of these three types of ownership, let’s address some of the questions that you’d probably ask yourself in choosing the appropriate legal form for your business.

  • In setting up your business, do you want to minimize the costs of getting started? Do you hope to avoid complex government regulations and reporting requirements?
  • How much control would you like? How much responsibility for running the business are you willing to share? What about sharing the profits?
  • Do you want to avoid special taxes?
  • Do you have all the skills needed to run the business?
  • Are you likely to get along with your co-owners over an extended period of time?
  • Is it important to you that the business survive you?
  • What are your financing needs and how do you plan to finance your company?
  • How much personal exposure to liability are you willing to accept? Do you feel uneasy about accepting personal liability for the actions of fellow owners?

No single form of ownership will give you everything you desire. You’ll have to make some trade-offs. Because each option has both advantages and disadvantages, your job is to decide which one offers the features that are most important to you. In the following sections we’ll compare three ownership options (sole proprietorship, partnership, corporation) on these eight dimensions.

Sole Proprietorship and Its Advantages

In a sole proprietorship , as the owner, you have complete control over your business. You make all important decisions and are generally responsible for all day-to-day activities. In exchange for assuming all this responsibility, you get all the income earned by the business. Profits earned are taxed as personal income and delineated on your tax return, so the business doesn’t pay any special federal and state income taxes.

Disadvantages of Sole Proprietorships

For many people, however, the sole proprietorship is not suitable. The flip side of enjoying complete control is having to supply all the different talents that may be necessary to make the business a success. And when you’re gone, the business dissolves. You also have to rely on your own resources for financing: in effect, you are the business and any money borrowed by the business is loaned to you personally. Even more important, the sole proprietor bears unlimited liability for any losses incurred by the business. The principle of unlimited personal liability means that if the business incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable. As a sole proprietor, you put your personal assets (your bank account, your car, maybe even your home) at risk for the sake of your business. You can lessen your risk with insurance, yet your liability exposure can still be substantial. Given that Ben and Jerry decided to start their ice cream business together (and therefore the business was not owned by only one person), they could not set their company up as a sole proprietorship.

Partnership

A partnership (or general partnership) is a business owned jointly by two or more people. About 10 percent of US businesses are partnerships [2] and though the vast majority are small, some are quite large. For example, the big four public accounting firms are partnerships. Setting up a partnership is more complex than setting up a sole proprietorship, but it’s still relatively easy and inexpensive. The cost varies according to size and complexity. It’s possible to form a simple partnership without the help of a lawyer or an accountant, though it’s usually a good idea to get professional advice.

Professionals can help you identify and resolve issues that may later create disputes among partners.

The Partnership Agreement

The impact of disputes can be lessened if the partners have executed a well-planned partnership agreement that specifies everyone’s rights and responsibilities. The agreement might provide such details as the following:

  • Amount of cash and other contributions to be made by each partner
  • Division of partnership income (or loss)
  • Partner responsibilities—who does what
  • Conditions under which a partner can sell an interest in the company
  • Conditions for dissolving the partnership
  • Conditions for settling disputes

Unlimited Liability and the Partnership

A major problem with partnerships, as with sole proprietorships, is unlimited liability : in this case, each partner is personally liable not only for his or her own actions but also for the actions of all the partners. If your partner in an architectural firm makes a mistake that causes a structure to collapse, the loss your business incurs impacts you just as much as it would him or her. And here’s the really bad news: if the business doesn’t have the cash or other assets to cover losses, you can be personally sued for the amount owed. In other words, the party who suffered a loss because of the error can sue you for your personal assets. Many people are understandably reluctant to enter into partnerships because of unlimited liability. Certain forms of businesses allow owners to limit their liability. These include limited partnerships and corporations .

Limited Partnerships

The law permits business owners to form a limited partnership which has two types of partners: a single general partner who runs the business and is responsible for its liabilities, and any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.

Advantages and Disadvantages of Partnerships

The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business. Second, it makes financing easier: the business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Finally, continuity needn’t be an issue because partners can agree legally to allow the partnership to survive if one or more partners die.

Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Second, being a partner means that you have to share decision making, and many people aren’t comfortable with that situation. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of jeopardizing the continuance of the business. Third, in addition to sharing ideas, partners also share profits. This arrangement can work as long as all partners feel that they’re being rewarded according to their efforts and accomplishments, but that isn’t always the case. While the partnership form of ownership is viewed negatively by some, it was particularly appealing to Ben Cohen and Jerry Greenfield. Starting their ice cream business as a partnership was inexpensive and let them combine their limited financial resources and use their diverse skills and talents. As friends they trusted each other and welcomed shared decision making and profit sharing. They were also not reluctant to be held personally liable for each other’s actions. However, friendship should not be the basis of going into business together. Unfortunately, being in business together can sometimes drive a wedge into the friendship.

Corporation

A corporation (sometimes called a regular or C-corporation) differs from a sole proprietorship and a partnership because it’s a legal entity that is entirely separate from the parties who own it. It can enter into binding contracts, buy and sell property, sue and be sued, be held responsible for its actions, and be taxed. Once businesses reach any substantial size, it is advantageous to organize as a corporation so that its owners can limit their liability. Corporations, then, tend to be far larger, on average, than businesses using other forms of ownership. As Figure 6.2 shows, corporations account for 18 percent of all US businesses but generate almost 82 percent of the revenues. [3] Most large well-known businesses are corporations, but so are many of the smaller firms with which likely you do business.

Two pie charts, laid side by side. The left pie chart is labeled “Percent of all businesses,” and is divided into 72% sole proprietorships, 18% corporations, and 10% partnerships. The right pie chart is labeled “Percent of all business revenues,” and is divided into 82% corporations, 14% partnerships, and 4% sole proprietorships.

Ownership and Stock

Corporations are owned by shareholders who invest money in the business by buying shares of stock . The portion of the corporation they own depends on the percentage of stock they hold. For example, if a corporation has issued 100 shares of stock, and you own 30 shares, you own 30 percent of the company. The shareholders elect a board of directors , a group of people (primarily from outside the corporation) who are legally responsible for governing the corporation, but not for the daily operations. . The board oversees the major policies and decisions made by the corporation, sets goals and holds management accountable for achieving them, and hires and evaluates the top executive, generally called the CEO ( chief executive officer ). The board also approves the distribution of income to shareholders in the form of cash payments called dividends.

Benefits of Incorporation

The corporate form of organization offers several advantages, including limited liability for shareholders, greater access to financial resources, specialized management, and continuity.

Limited Liability

The most important benefit of incorporation is the limited liability to which shareholders are exposed: they are not responsible for the obligations of the corporation, and they can lose no more than the amount that they have personally invested in the company. Limited liability would have been a big plus for the unfortunate individual whose business partner burned down their dry cleaning establishment. Had they been incorporated, the corporation would have been liable for the debts incurred by the fire. If the corporation didn’t have enough money to pay the debt, the individual shareholders would not have been obligated to pay anything. They would have lost all the money that they’d invested in the business, but no more.

Financial Resources

Incorporation also makes it possible for businesses to raise funds by selling stock. This is a big advantage as a company grows and needs more funds to operate and compete. Depending on its size and financial strength, the corporation also has an advantage over other forms of business in getting bank loans. An established corporation can borrow its own funds, but when a small business needs a loan, the bank usually requires that it be guaranteed by its owners.

Specialized Management

Because of their size and ability to pay high sales commissions and benefits, corporations are generally able to attract more skilled and talented employees than are proprietorships and partnerships.

Continuity and Transferability

Another advantage of incorporation is continuity . Because the corporation has a legal life separate from the lives of its owners, it can (at least in theory) exist forever.

Transferring ownership of a corporation is easy: shareholders simply sell their stock to others. Some founders, however, want to restrict the transferability of their stock and so choose to operate as a privately-held corporation. The stock in these corporations is held by only a few individuals, who are not allowed to sell it to the general public.

Companies with no such restrictions on stock sales are called public corporations; stock is available for sale to the general public.

Drawbacks to Incorporation

Like sole proprietorships and partnerships, corporations have both positive and negative aspects. In sole proprietorships and partnerships, for instance, the individuals who own and manage a business are the same people. Corporate managers, however, don’t necessarily own stock, and shareholders don’t necessarily work for the company. This situation can be troublesome if the goals of the two groups differ significantly.

Managers, for example, are often more interested in career advancement than the overall profitability of the company. Stockholders might care more about profits without regard for the well-being of employees. This situation is known as the agency problem , a conflict of interest inherent in a relationship in which one party is supposed to act in the best interest of the other. It is often quite difficult to prevent self-interest from entering into these situations.

Another drawback to incorporation—one that often discourages small businesses from incorporating—is the fact that corporations are more costly to set up. When you combine filing and licensing fees with accounting and attorney fees, incorporating a business could set you back by $1,000 to $6,000 or more depending on the size and scope of your business. [4] Additionally, corporations are subject to levels of regulation and governmental oversight that can place a burden on small businesses. Finally, corporations are subject to what’s generally called “ double taxation .” Corporations are taxed by the federal and state governments on their earnings. When these earnings are distributed as dividends, the shareholders pay taxes on these dividends. Corporate profits are thus taxed twice—the corporation pays the taxes the first time and the shareholders pay the taxes the second time.

Five years after starting their ice cream business, Ben Cohen and Jerry Greenfield evaluated the pros and cons of the corporate form of ownership, and the “pros” won. The primary motivator was the need to raise funds to build a $2 million manufacturing facility. Not only did Ben and Jerry decide to switch from a partnership to a corporation, but they also decided to sell shares of stock to the public (and thus become a public corporation). Their sale of stock to the public was a bit unusual: Ben and Jerry wanted the community to own the company, so instead of offering the stock to anyone interested in buying a share, they offered stock to residents of Vermont only. Ben believed that “business has a responsibility to give back to the community from which it draws its support.” [5] He wanted the company to be owned by those who lined up in the gas station to buy cones. The stock was so popular that one in every hundred Vermont families bought stock in the company. [6] Eventually, as the company continued to expand, the stock was sold on a national level, and the company acquired by Unilever in 2000. Although there were initial fears of it being a hostile takeover, Unilever claims “to achieve our collective vision of a global economy where all business works to create a more shared and durable prosperity for all.” [7]

Other Types of Business Ownership

In addition to the three commonly adopted forms of business organization—sole proprietorship, partnership, and regular corporations—some business owners select other forms of organization to meet their particular needs. We’ll look at two of these options:

  • Limited-liability companies
  • Not-for-profit corporations

Limited-Liability Companies

How would you like a legal form of organization that provides the attractive features of the three common forms of organization (corporation, sole proprietorship and partnership) and avoids the unattractive features of these three organization forms? The limited-liability company (LLC) accomplishes exactly that. This form provides business owners with limited liability (a key advantage of corporations) and no “double taxation” (a key advantage of sole proprietorships and partnerships). Let’s look at the LLC in more detail.

In 1977, Wyoming became the first state to allow businesses to operate as limited-liability companies. Twenty years later, in 1997, Hawaii became the last state to give its approval to the new organization form. Since then, the limited-liability company has increased in popularity. Its rapid growth was fueled in part by changes in state statutes that permit a limited-liability company to have just one member. The trend to LLCs can be witnessed by reading company names on the side of trucks or on storefronts in your city. It is common to see names such as Jim Evans Tree Care, LLC, and For-Cats-Only Veterinary Clinic, LLC. But LLCs are not limited to small businesses. Companies such as Crayola, Domino’s Pizza, Ritz-Carlton Hotel Company, and iSold It (which helps people sell their unwanted belongings on eBay) are operating under the limited-liability form of organization.

In a limited-liability company, owners (called members rather than shareholders) are not personally liable for debts of the company, and its earnings are taxed only once, at the personal level (thereby eliminating double taxation).

We have touted the benefits of limited liability protection for an LLC. We now need to point out some circumstances under which an LLC member (or a shareholder in a corporation) might be held personally liable for the debts of his or her company. A business owner can be held personally liable if he or she:

  • Personally guarantees a business debt or bank loan which the company fails to pay.
  • Fails to pay employment taxes to the government.
  • Engages in fraudulent or illegal behavior that harms the company or someone else.
  • Does not treat the company as a separate legal entity, for example, uses company assets for personal uses.

Not-for-Profit Corporations

A not-for-profit corporation (sometimes called a nonprofit) is an organization formed to serve some public purpose rather than for financial gain. As long as the organization’s activity is for charitable, religious, educational, scientific, or literary purposes, it can be exempt from paying income taxes. Additionally, individuals and other organizations that contribute to the not-for-profit corporation can take a tax deduction for those contributions. The types of groups that normally apply for nonprofit status vary widely and include churches, synagogues, mosques, and other places of worship; museums; universities; and conservation groups.

There are more than 1.5 million not-for-profit organizations in the United States. [8] Some are extremely well funded, such as the Bill and Melinda Gates Foundation, which has an endowment of approximately $40 billion and has given away $36.7 billion since its inception. [9] Others are nationally recognized, such as United Way, Goodwill Industries, Habitat for Humanity, and the Red Cross. Yet the vast majority is neither rich nor famous, but nevertheless makes significant contributions to society.

Mergers and Acquisitions

The headline read, “Wanted: More than 2,000 in Google Hiring Spree.” [10] The largest Web search engine in the world was disclosing its plans to grow internally and increase its workforce by more than 2,000 people, with half of the hires coming from the United States and the other half coming from other countries. The added employees will help the company expand into new markets and battle for global talent in the competitive Internet information providers industry. When properly executed, internal growth benefits the firm.

An alternative approach to growth is to merge with or acquire another company. The rationale behind growth through merger or acquisition is that 1 1 = 3: the combined company is more valuable than the sum of the two separate companies. This rationale is attractive to companies facing competitive pressures. To grab a bigger share of the market and improve profitability, companies will want to become more cost efficient by combining with other companies.

Though they are often used as if they’re synonymous, the terms merger and acquisition mean slightly different things. A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another. An example of an acquisition is the creation of the “New T-Mobile” in 2020 resulting from T-Mobile acquiring Sprint. [11]

Another example of an acquisition is the purchase of Reebok by Adidas for $3.8 billion. [12]  The deal was expected to give Adidas a stronger presence in North America and help the company compete with rival Nike. Once this acquisition was completed, Reebok as a company ceased to exist, though Adidas still sells shoes under the Reebok brand.

Motives Behind Mergers and Acquisitions

Companies are motivated to merge or acquire other companies for a number of reasons, including the following.

Gain complementary products

Acquiring complementary products was the motivation behind Adidas’s acquisition of Reebok. As then Adidas CEO Herbert Hainer stated in a conference call, “This is a once-in-a-lifetime opportunity. This is a perfect fit for both companies, because the companies are so complementary … Adidas is grounded in sports performance with such products as a motorized running shoe and endorsement deals with such superstars as British soccer player David Beckham. Meanwhile, Reebok plays heavily to the melding of sports and entertainment with endorsement deals and products by Nelly, Jay-Z, and 50 Cent. The combination could be deadly to Nike.” Of course, Nike has continued to thrive, but one can’t blame Hainer for his optimism. [13]

Attain new markets or distribution channels

Gaining new markets was a significant factor in the 2005 merger of US Airways and America West. US Airways was a major player on the East Coast, the Caribbean, and Europe, while America West was strong in the West. The expectations were that combining the two carriers would create an airline that could reach more markets than either carrier could do on its own. [14]

Realize synergies

The purchase of Pharmacia Corporation (a Swedish pharmaceutical company) by Pfizer (a research-based pharmaceutical company based in the United States) in 2003 created one of the world’s largest drug makers and pharmaceutical companies, by revenue, in every major market around the globe. [15]  The acquisition created an industry giant with more than $48 billion in revenue and a research-and-development budget of more than $7 billion. Each day, almost forty million people around the globe are treated with Pfizer medicines. [16]  Its subsequent $68 billion purchase of rival drug maker Wyeth further increased its presence in the pharmaceutical market. [17]

In pursuing these acquisitions, Pfizer likely identified many synergies : quite simply, a whole that is greater than the sum of its parts. There are many examples of synergies. A merger typically results in a number of redundant positions; the combined company does not likely need two vice presidents of marketing, two chief financial officers, and so on. Eliminating the redundant positions leads to significant cost savings that would not be realized if the two companies did not merge. Let’s say each of the companies was operating factories at 50 percent of capacity, and by merging, one factory could be closed and sold. That would also be an example of a synergy. Companies bring different strengths and weaknesses into the merged entity. If the newly-combined company can take advantage of the marketing capabilities of the stronger entity and the distribution capabilities of the other (assuming they are stronger), the new company can realize synergies in both of these functions.

Hostile takeover

What happens, though, if one company wants to acquire another company, but that company doesn’t want to be acquired? The outcome could be a hostile takeover —an act of assuming control that’s resisted by the targeted company’s management and its board of directors. Ben Cohen and Jerry Greenfield found themselves in one of these situations: Unilever—a very large Dutch/British company that owns three ice cream brands—wanted to buy Ben & Jerry’s, against the founders’ wishes. Most of the Ben & Jerry’s stockholders sided with Unilever. They had little confidence in the ability of Ben Cohen and Jerry Greenfield to continue managing the company and were frustrated with the firm’s social-mission focus. The stockholders liked Unilever’s offer to buy their Ben & Jerry’s stock at almost twice its current market price and wanted to take their profits. In the end, Unilever won; Ben & Jerry’s was acquired by Unilever in a hostile takeover. [18]  Despite fears that the company’s social mission would end, it didn’t happen. Though neither Ben Cohen nor Jerry Greenfield are involved in the current management of the company, they have returned to their social activism roots and are heavily involved in numerous social initiatives sponsored by the company.

Chapter Video: Business Structures 

Here is a short video providing a simple and straightforward recap of the key points of each form of business ownership.

(Copyrighted material)

Key Takeaways

  • A sole proprietorship, a business owned by only one person, accounts for 72 percent of all US businesses.
  • Advantages include: complete control for the owner, easy and inexpensive to form, and owner gets to keep all of the profits.
  • Disadvantages include: unlimited liability for the owner, complete responsibility for talent and financing, and business dissolves if the owner dies.
  • A general partnership is a business owned jointly by two or more people, and accounts for about 10 percent of all US businesses.
  • Advantages include: more resources and talents come with an increase in partners, and the business can continue even after the death of a partner.
  • Disadvantages include: partnership disputes, unlimited liability, and shared profits.
  • A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment.
  • A corporation is a legal entity that’s separate from the parties who own it, the shareholders who invest by buying shares of stock. Corporations are governed by a Board of Directors, elected by the shareholders.
  • Advantages include: limited liability, easier access to financing, and unlimited life for the corporation.
  • Disadvantages include: the agency problem, double taxation, and incorporation expenses and regulations.
  • A limited-liability company (LLC) is a business structure that combines the tax treatment of a partnership with the liability protection of a corporation.
  • A not-for-profit corporation is an organization formed to serve some public purpose rather than for financial gain. It enjoys favorable tax treatment.
  • A merger occurs when two companies combine to form a new company.
  • An acquisition is the purchase of one company by another with no new company being formed. A hostile takeover occurs when a company is purchased even though the company’s management and Board of Directors do not want to be acquired.

Image Credits: Chapter 6

Figure 6.1: Megan Robertson (2012). “Ben Cohen and Jerry Greenfield on the Dylan Ratigan Show.” Wikimedia Commons. CC BY 2.0 . Retrieved from: https://commons.wikimedia.org/wiki/File:Ben_Cohen_and_Jerry_Greenfield_on_the_Dylan_Ratigan_Show_(2012).jpg

Figure 6.2: U.S. Census Bureau. “Number of Tax Returns, Receipts, and Net Income by Type of Business” in Statistical Abstract of the United States: 2012 . Retrieved from: https://www.census.gov/prod/2011pubs/12statab/business.pdf

Video Credits: Chapter 6

Bean Counter (2014, March 9). “Business Structures.” YouTube. Retrieved from: https://www.youtube.com/watch?v=z-GLrHhuDEM

  • Fred Chico Lager (1994). Ben & Jerry’s: The Inside Scoop . New York: Crown Publishers. ↵
  • IRS (2015). “SOI Bulletin Historical Table 12: Number of Business Income Tax Returns, by Size of Business for Income Years 1990-2013.” Retrieved from: https://www.irs.gov/uac/soi-tax-stats-historical-table-12 ↵
  • United States Census Bureau (2011). “Number of Tax Returns, Receipts, and Net Income by Type of Business” in Statistical Abstract of the United States: 2012. Retrieved from: https://www.census.gov/prod/2011pubs/12statab/business.pdf ↵
  • AllBusiness Editors (2016). “How Much Does it Cost to Incorporate?” AllBusiness.com. Retrieved from: http://allbusiness.sfgate.com/legal/contracts-agreements-incorporation/2531-1.htm ↵
  • Fred Chico Lager (1994). Ben & Jerry’s: The Inside Scoop . New York: Crown Publishers. p. 91. ↵
  • Fred Chico Lager (1994). Ben & Jerry’s: The Inside Scoop . New York: Crown Publishers. p. 103. ↵
  • Elizabeth Freeburg (n.d.). "Unilever, Multinationals, and the B Corp Movement." Certified B Corporation. Retrieved from: https://bcorporation.net/news/unilever-multinationals-and-b-corp-movement ↵
  • Urban Institute National Center for Charitable Statistics (2010). “Number of Nonprofit Organizations in the United States, 1999 – 2009.” Urban Institute National Center for Charitable Statistics. Retrieved from: http://nccsdataweb.urban.org/PubApps/profile1.php?state=US ↵
  • The Bill and Melinda Gates Foundation (2016). “Who We Are: Foundation Fact Sheet.” Retrieved from: http://www.gatesfoundation.org/Who-We-Are/General-Information/Foundation-Factsheet ↵
  • Alexei Oreskovic (2010). “Wanted: More Than 2,000 in Google Hiring Spree.” Reuters. Retrieved from: http://www.reuters.com/article/us-google-idUSTRE6AI05820101119 ↵
  • Uncarrier (2020). "T-Mobile Completes Merger with Sprint to Create the New T-Mobile." T-Mobile.com. Retrieved from: https://www.t-mobile.com/news/un-carrier/t-mobile-sprint-one-company ↵
  • Theresa Howard (2005). “Adidas, Reebok Lace up for a Run Against Nike.” USA Today. Retrieved from: http://usatoday30.usatoday.com/money/industries/manufacturing/2005-08-02-adidas-usat_x.htm ↵
  •  Ibid. ↵
  •  CNN (2005). “America West, US Air in Merger Deal.” CNN Money. Retrieved from: http://money.cnn.com/2005/05/19/news/midcaps/airlines/index.htm ↵
  •  Robert Frank and Scott Hensley (2002). “Pfizer to Buy Pharmacia for Billion in Stock.” The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/SB1026684057282753560 ↵
  •  Pfizer (2003). “2003: Pfizer and Pharmacia Merger.” Pfizer.com. Retrieved from: http://www.pfizer.com/about/history/pfizer_pharmacia ↵
  •  Andrew Ross Sorkin and Duff Wilson (2009). “Pfizer Agrees to Pay Billion for Rival Drug Maker Wyeth.” New York Times. Retrieved from: http://www.nytimes.com/2009/01/26/business/26drug.html?pagewanted=2&_r=0 ↵
  •  CNN (2000). “Ben and Jerry’s Scooped Up.” CNN Money. Retrieved from: http://money.cnn.com/2000/04/12/deals/benandjerrys/ ↵

Fundamentals of Business, 3rd edition Copyright © 2020 by Stephen J. Skripak and Ron Poff is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Radiology has seen an uptick in private equity ownership, with investors holding a dominant market share in some geographies, according to new research published Monday.

Across 10 different specialties analyzed including radiology, the number of PE-acquired practice sites swelled 608%, from 816 in 2012 up to 5,779 in 2021. Private equity acquired 257 radiology practice sites as of 2021, accounting for about 4.4% of all PE acquisitions, experts wrote in Health Affairs [1] .

Across the specialty, 15 private equity firms held market shares greater than 30% in their service area, at an average of about 48%. Four PE firms held market shares greater than 50% in radiology, controlling an average of nearly 71% in the given geography.

“Especially since 2020, these high market shares raise competitive concerns about PE control of specialty care in those areas,” Ola Abdelhadi, MD, PhD, a researcher and epidemiologist with the University of California, Berkeley, and co-authors concluded. “The high PE market shares observed in specific [metropolitan statistical areas] warrant close scrutiny by the Federal Trade Commission, state regulators and policymakers, as these shares could adversely affect healthcare prices and quality.”

Abdelhadi et al. pinpointed practices acquired by PE between 2012 and 2021 using databases from Irving Levin Associates and Pitchbook. They supplemented the analysis with further information from news outlets, press releases and other industry reports. Along with radiology, the authors also investigated primary care, dermatology, OB/GYN, gastroenterology, ophthalmology, oncology, urology, orthopedics and cardiology.

PE-acquired practices were less likely to employ female physicians than their counterparts (at 37% vs. over 40%). And nearly half of all PE acquisitions across the 10 specialties occurred in the South (at 48%). Private equity also upped the number of metropolitan areas targeted during the study period, rising from 119 MSAs in 2012 to 307 in 2021.

The study sample included 19,908 radiologists, with 1,181 working in private equity-acquired entities (for a market penetration of 5.93%). A total of 4,991 radiology practice sites were acquired by other non-PE entities during the study period, accounting for 3.8% of the 131,552 total such acquisitions across all specialties examined. Out of all 1,094 private equity acquisitions, dermatology saw the largest share of ownership changes at 34%, followed by ophthalmology (25%) and gastroenterology (11%).

“We found that specialties such as primary care, obstetrics-gynecology, radiology, orthopedics, urology, and oncology also showed considerable increases from 2012 to 2021,” the authors noted. “Acquisition of these physician practices may be attractive to PE firms because of the fragmentation of the practices and increasing patient demands as the result of an aging population and rising private insurance coverage.”

Abdelhadi and co-authors also highlighted the high market share held by other non-PE entities in radiology. However, they find the concentration of market power among private equity “more problematic” for various reasons.

“PE firms tend to prioritize short-term profit maximization over long-term investment in patient care and infrastructure, implement aggressive acquisition strategies that may curtail patient choice and competition, use complex financial structures and leverage to finance acquisitions, and possess limited experience in the healthcare industry—all of which may lead to difficulties in managing and enhancing patient care,” they noted.

You can read much more, including potential study limitations, at the link below.  Laura Alexander, deputy director of the Federal Trade Commission's Bureau of Competition, also co-authored the report. The FTC announced Tuesday that it is launching an inquiry to assess private equity's impact on healthcare. 

Related Articles:

Radiology partners leader to the specialty: ‘keep your spears pointed outwards’, private equity returns plummet to lowest levels seen since 2009, private equity firm healthedge invests in leading provider of teleradiology services, private equity-backed solis mammography inks ‘groundbreaking’ partnership with hca healthcare, white house announces plan to scrutinize private equity ownership in healthcare.

  • Ola Abdelhadi et al. “ Private Equity–Acquired Physician Practices And Market Penetration Increased Substantially, 2012–21 .” Health Affairs . March 4, 2024.

Marty Stempniak

Marty Stempniak has covered healthcare since 2012, with his byline appearing in the American Hospital Association's member magazine, Modern Healthcare and McKnight's. Prior to that, he wrote about village government and local business for his hometown newspaper in Oak Park, Illinois. He won a Peter Lisagor and Gold EXCEL awards in 2017 for his coverage of the opioid epidemic. 

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    The term "form of ownership" refers to the legal structure through which your company operates. Your business will benefit greatly from this in terms of liability and taxation, as well as management and growth possibilities. In this article, we'll look at the various ownership options, understand their pros and cons, and determine which ...

  22. Chapter 6 Forms of Business Ownership

    Learning Objectives. Identify the questions to ask in choosing the appropriate form of ownership for a business. Describe the sole proprietorship and partnership forms of organization, and specify the advantages and disadvantages. Identify the different types of partnerships, and explain the importance of a partnership agreement.

  23. S corporations

    In order to become an S corporation, the corporation must submit Form 2553, Election by a Small Business Corporation signed by all the shareholders. See the Instructions for Form 2553 PDF for all required information and to determine where to file the form. Filing Requirements:

  24. PDF Forms of Business Ownership

    Forms of Business Ownership Learning Objectives 1) Identify the questions to ask in choosing the appropriate form of ownership for a business. 2) Describe the sole proprietorship and partnership forms of organization, and specify the advantages and disadvantages. 3) Identify the different types of partnerships, and explain the

  25. FinCEN's New Requirement for Reporting Beneficial Ownership

    Effective Jan. 1, more than 32 million business owners need to complete a special form called the Beneficial Ownership Information Report. You'll need to file it with the Financial Crimes Enforcement Network (FinCEN), an arm of the U.S. Department of the Treasury. The form is required as part of the 2021 Corporate Transparency Act.

  26. Private equity ownership in radiology rises, with investors holding

    Radiology has seen an uptick in private equity ownership, with investors holding a dominant market share in some geographies, according to new research published Monday. Across 10 different specialties analyzed including radiology, the number of PE-acquired practice sites swelled 608%, from 816 in 2012 up to 5,779 in 2021.

  27. Corporate Transparency Act Declared Unconstitutional In New Case

    Notice Regarding National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala.) Immediate Release March 04, 2024. On March 1, 2024, in the case of National Small Business United v.