By Glory Jun, 17, 2020 Featured

When it comes to understanding business ownership some fundamentals must be discussed to give you the basic idea. These fundamentals include the different types of businesses and ownership structures. 

Business Ownership Explained

Business ownership is the control over a business or enterprise, having the ultimate power to dictate the operations and functions. As an aspiring business owner, the first decision you must make is how you want your business to be structured. This would help you put long-term implications into consideration. If you are not sure how to go about it, you can begin by consulting with an accountant or attorney to guide you in your decision making. There are also guidelines that can help you, they include;

• Your expectations of the nature and size of the business
• The level of control you want to have over the business
• The level of structure you are ready to take up
• Possible vulnerabilities and lawsuits associated with the nature of the business
• The decision to reinvest the business earnings or not

Different approaches to owning a business

As an individual, a team or group looking to own a business, you can achieve it in three major ways:

• Start a new business from scratch
• Franchise an existing business
• Buy an existing business

Starting a business from scratch gives you the leverage of becoming your own boss. It is an express ticket to becoming a company owner and it comes with strategic benefits. The most obvious advantage is that it gives you complete control over your business without being contractually bound to anyone else. By all implications, you have the liberty to make rules and plans for your business or company without the interference of third-party. 

Franchising on the other hand has to do with merging part an existing business with a new business. Franchising gives you the right to advertise and market another business’s products under your company. It comes with its advantages as well, such as lowering the chances of risk. Starting a new business is quite demanding and involves a lot of risks, but franchising gives you the opportunity to build on the success of an existing company. A franchise business owner would be more concerned in marketing the products of the existing company, rather than the production process. 

Some people prefer the option of just buying an existing company without having to go through the stress of creating and developing the company. Buying a company is a strategic way of owning a business and it has its benefits as well. It allows you to own a business with less time required to get the business running and lower expenses than you would have spent on establishing a new business. 

Types of Business Ownership

Choosing a business structure is necessary when either starting a new business or reworking a current business plan. Businesses take different forms, therefore, it is expedient that different business ownership structures must be in place to make a business operate effectively. There are five types of business ownership, they include;

1.    Sole proprietorship

2.    Partnership

3.    Limited liability company

4.    Corporation

5.    Cooperative

Sole Proprietorship

The majority of businesses in the US and the rest of the world start out as sole proprietorships. Typically, these businesses are owned by one person, that is, the person who is responsible for running the day-to-day affairs of the business. As a sole proprietor, you own all the assets of the business as well as the profits generated by it. Sole proprietors also assume complete responsibility for any debts or liabilities the business incurs. There is no separation between the owner and the business, before the law, the owner and business are one.

Federal tax forms for Sole Proprietorship: As a sole proprietor you will be required to pay taxes like every other established company. 

The requirements for Sole Proprietorship are as follows:

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

Note: Some may not apply

Advantages of Sole Proprietorship

• An easy and less expensive way to start a business 
• Full ownership and control over the business as recognized by the law
• All earnings and profits generated by the business goes to the sole proprietor
• The business can be easily dissolved without any legal implications

Disadvantages of Sole Proprietorship

• Unlimited liability 
• Sole proprietors are legally responsible for all debts the business incurs
• May have to fund the business from personal savings or business loans
• May not provide employees with employee benefits such as medical insurance premiums.

Partnership

The partnership business structure requires that two or more people share a business. The partnership is closely related to a sole proprietorship, in that, before the eyes of the law, the business and its owners are the same. However, the partners should sign a legal agreement that states how the responsibilities and roles will be divided amongst them. This includes clearly stating how decisions will be made, how profits will be shared, and how future partnerships should be done. It should also include what necessary partners must take if either of them decides to opt out or if they decide to dissolve the business. It is wrong to assume that a partnership will not split just because the business is new. Many partnerships “break up” on different grounds. Therefore, it is wise to have a plan on ground before time. 

Types of Partnership

1.    General Partnership: Partners may decide to share the responsibility for management and liability, and also, shares of profits or loss depending on their initial agreement. Equal shares can only be assumed in the absence of any agreement that doesn’t clearly state profits division.

2.    Limited Partnership/Partnership with Limited Liability: Partners in this category may be limited in terms of the extent of their investment and limited input as regards management decisions. This type of partnership is not usually used for operating retail or service businesses. While forming a partnership may have its benefits, a limited partnership is more complex and demanding.

3.    Joint Venture: Joint ventures are similar to general partnerships, and they are clearly for a limited period of time. If partners of a joint venture decide to continue or repeat an activity, they will be regarded as an ongoing partnership and will be required to file as such. They will also need to distribute accumulated partnership assets when the ongoing partnership dissolves.

Federal tax forms for Partnerships

• Form 1040: Individual Income Tax Return
• Form 1040-ES: Estimated Tax for Individuals
• Form 1065: Partnership Return of Income
• Form 1065 K-1: Partner’s Share of Income, Credit, Deductions
• Form 4562: Depreciation
• Schedule E: Supplemental Income and Loss
• Schedule SE: Self-Employment Tax
• Employment Tax Forms

Advantages of Partnership

• Both partners get to share the burden of starting a new business
• They are relatively easy to start up, even though it is necessary to invest more time into developing a solid partnership agreement.
• Both partners receive the profits from the business flow directly through their personal tax returns.
• An individual can generate more capital for a business by offering partnership deals.
• The business operations will be easier to run if both partners are well-skilled in their respective areas of expertise.

Disadvantages of a Partnership

• The partners bear jointly bear the burden of liabilities or debts incurred by the business.
• The partnership may end upon the death or withdrawal of a partner
• Disagreements can arise from time to time since unanimous decisions must be made by the partners.
• Profits must be equally shared among the partners

Corporations

A corporation is considered to be a unique entity that operates separately from those who own it. The owners of a corporation function as its shareholders, they have the leverage of electing board of directors to oversee the affairs of the major decisions and policies of the corporation. A typical corporation can be taxed, sued, and can enter contractual agreements. A corporation can stand on its own and does not need to dissolve when ownership is changed.

There are several types of corporations, and each has features that distinguish it from the other. They are;

• C corporation; a regular corporation that has its own entity separate from its owners. The owners offer protection in terms of personal liability.
• S corporation; a type of corporation that is created to avoid double taxation. Owners must file a special election, by so doing, all profits and losses are transferred to stockholders.
• B corporations; their missions are quite similar to non-profit organizations, but they are for profit. Stakeholders do not mind the corporations to offer public benefits, but there must be profit at the end.
• Close corporation; they are similar to A and B corporations.
• Nonprofit corporation; these corporations provide charitable services to the public with no profits incurred.

Federal tax forms for Regular Corporations

• Form 1120 or 1120-A: Corporation Income Tax Return
• Form 1120-W: Estimated Tax for Corporation
• Form 4625: Depreciation
• Form 8109-B: Deposit Coupon
• Employment Tax Forms

Note: There are also other forms needed for alternative maximum tax, capital gains, sale of assets, etc.

Advantages of a Corporation

• Shareholders can only be held accountable for investments made in the company stock.
• Corporations can go public, which will attract more public investors
• Corporations can raise more funds through selling stocks
• Shareholders have limited liability that covers them from partaking in the corporation’s liabilities or debts incurred by the corporation.

Disadvantages of a Corporation

• Establishing a corporation requires more investment in time and money compared to other types of organizations
• Corporations are usually monitored by federal, state, and selected local agencies.
• It may result in higher taxes, generally. Dividends paid to shareholders are not deducted from business income.

Cooperative

A cooperative is a privately-owned business that is owned and operated by the same people that use its services or products. The overall purpose of a cooperative is to meet the needs of the owners. The profits are distributed among the people in the corporative based on their contributions; they are known as user-owners. Cooperatives have elected boards that run the business, and members can buy shares to qualify to be part of the decision making processes.

Federal Tax Forms for a Cooperative

• Form 1120-C: Income Tax Return 

Advantages of a Cooperative

• Funding opportunities
• Reduces costs, and improves products and services
• Funding opportunities
• Democratic organizational structure.

Disadvantages of a Cooperative

• Lack of membership and participation
• Difficulty in obtaining capital through investors

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