Before starting a business and be a full-fledged business owner, you should first choose among the types of business ownership your business will be. These will affect the entirety of the business. These will affect factors including management, the process of operation, and continuity. An entrepreneur needs to decide on how many owners should have. It is also vital to know how and when to implement changes in business ownership. We will be talking about these types of business ownership and how it affects the business.
Sole proprietorship
Characteristics of Sole Proprietorship
A sole proprietorship is the most common and most basic type of business ownership. The business owner has the sole responsibility for the whole business. All the decision and debts will fall under the business owner. But this also means that all the profits gained will be the proprietors’ income. Most entrepreneurs choose this business because they have the liberty to decide. Execution of the decisions for a sole proprietorship type of business is more accessible. It happens since a is that there is only one decision-maker. This type of business ownership is easy and inexpensive, making it more flexible. The direction of the business depends on the discretion of the owner.
A sole proprietorship may be the simplest business type, but one of the major disadvantages of a sole proprietorship is it has limited resources. It becomes limited because there is only one source of resources. With this in mind, most entrepreneurs shift to other types of business ownership when the business grows. An increase in resources is proportionate to the growth of the business. A sole proprietorship is often used only at the start of business because of this reason.
Partnership
Characteristics of Partnership
A general partnership is when two or more owners associate in running the business. A partnership usually runs under the partnership agreements. There are two types of partnership ownership, a general and limited partnership. In general partnership, all owners have unlimited liability with the business. While in a limited partnership, the business has a limited partner and a general partner. A limited partner only has liability within his investment. While the general partner is the one that holds the full liability, these type of business ownership can get more income since there are many sources. The owners can share resources and knowledge that can bring the business to a higher state.
While there is the advantage of more resources, it is harder to control. Implementation of an owner’s decision is complex since there are other owners. The execution of all process should consider the decision of all owners. It always has the potential to start conflicts. It is useful in the early stages of the business since there is not a lot of people involved.
Corporation
Characteristics of Corporation
It is a business that is a legal entity separate from its owners. The corporation is run by a group of people that manages the business. The people who lead a corporation are the directors. One of the characteristics of a corporation includes giving limited liability to all owners. The owners of a corporation are called stockholders. This means that a corporation is a business that is legally separate and distinct from its owners. It is also easier for corporations to generate capital due to a larger pool of resources. The owner can only lose up to the invested amount. It is also easier to have the transfer of ownership within the corporation.
A business organized as a corporation is a bigger business entity than the previous two. Although this may be true, there are also disadvantages. This type of business ownership requires more documents for government regulations. Developing it would need more legal documents and more extensive record keeping. Also, a corporation includes double taxation. The corporation, as a different entity, needs to pay taxes. And then, the shareholders also pay individual taxes on dividends received. A corporation is a fit for fast-growing organizations that needs more investors.
Cooperative
Characteristics of Cooperative
Cooperative has an association member as it’s business owners. This type of business ownership allows a democratic approach. They use the shares as a basis for the amount of vote. This approach results in more extended decision making and execution. It is due to the process of requiring all association member’s participation. Conflicts are faster since there are more decision-makers. It affects business efficiency. The longer decision-making process will generally delay the business process. It affects the schedule and quality of outputs by the business.
Cooperative also has limited liability for all its owners. Ownership percentage dictates the profit distributed among members — a cooperative type of business used by individuals or groups to achieve a common goal. The business goal would be to solve a common problem that the members encounter.
Franchise
Characteristics of Franchise
Franchising is a type of business ownership that is different in most of them. It allows a person to own a borrowed business brand and business model for a specified period. The borrower or “franchisee” manages a business that is under a certain brand. The owner of the brand called “franchisor” provides the business process. A franchise offers training, system, technologies, guidance, advertising, and other business needs. It is business ownership in which you buy the brand and market under it.
The advantages of a franchise are that the franchise does not hold any control on the decision. They need to follow the regulations set by the business brand. Since there are regulations, there is a restriction in maintaining your ownership. There are also fees like royalties on sales and franchising fees. They also have limited options for suppliers for their product. Before the transfer of ownership, the franchisor must approve the transfer. Despite the disadvantages, there is a faster return of investment depending on the brand and the more popular or successful the brand, the quicker the results.