Forms of Business Ownership : Important 3 Types of Ownership

There have three forms of business ownership. That’s below mentioned –

  • Sole Proprietorships
  • Partnership
  • Corporations

1. Sole Proprietorship – Forms of Business Ownership:

The oldest, most common form of private business ownership in the United States is the sole proprietorship. A sole proprietorship is a business owned and managed by one individual. That person may receive help from others in operating the business but is the only boss; the sole proprietorship is the company.

            Typically the sole proprietorship owns a small service or retail operation, such as a roadside produce stand, hardware store, bakery, or restaurant. The sole owner, often aided by one or two employees, operates a small shop that frequently caters to a group of regular customers. The capital needed to start and operate the business is normally provided by the owner through personal wealth or borrowed money.

The sole proprietorship is usually an active manager, working in the shop every day. He or she controls the operations, supervises the employees, and makes the decisions. The managerial ability of the owner usually accounts for the success or failure of the business.

Advantages of Sole Proprietorship:

Many people desire to be their own boss. A sole proprietorship accomplishes this goal; it has other advantages as well.

Ease of starting: sole proprietorship is the easiest way to start a business. It involves a minimum number of problems.

Control: As the owner, owner is the boss, who made final decisions. Any time owner can takes decisions.

Sole Participation in Profits and Losses: All profits earned or losses incurred by operating the owner. In contrast, partners share profits or losses. In states that permit one person to own a corporation, ownership of profits and losses in such cases compares to that in the sole proprietorship.

Use of Owners Abilities: Owner had everything to lose or gain from his or her efforts. The chance of personal losses motivated her or his to devote time, energy, and expertise to the operation, and success depended largely on the efficient use of his abilities. Owner had to use his or her own managerial abilities or pay someone else who had managerial expertise. Either way, full credit for success or blame for failure belonged to owner.

Tax Breaks: A major advantageof thesole proprietorship is that the business pays no income tax. A corporation pays taxes on profits; its owners, the shareholders, also pay taxes on their dividends.

Secrecy: Sole proprietorship has more information on income, expense, hours worked, and other items required by income tax regulations. This information typically is not made available to the public.

Disadvantage of a Sole Proprietorship:

If the sole proprietorship had only advantages, a person organizing a business would have little to consider. But the realities of business are never so simple or certain. Sole proprietorship have disadvantages too.

Unlimited Liability:

Difficulty in Raising Capital:

Limitations in Managerial Ability:

Lack of Stability:

2. Partnerships – Forms of Business Ownership:

A business may have a small beginning as a sole proprietorship, later expand into a partnership, and finally become corporations. Partnership is a business owned by two or more people. A partnership can be based on a written contract or a voluntary and a legal oral agreement.

Types of Partnerships: The three major types are (i) general partnership, (ii) limited partnership, and (iii) joint venture.

General Partnership:

A general partnership is a business with at least one general partner who has unlimited liability for the debts of the business. Regardless of the percentage of the business they own, general partners have authority to act and to make binding decisions as owners of the business. The general partner may be liable for all the debts. Partners generally share profits and losses according to a plan specified by agreement between them.

Limited Partnership:

All partnerships must have at least one general partner. A limited partnership includes one or more general partners and one or more limited partners. The general partners arrange and run the business, while the limited partners are investors only. Investors receive special tax advantages and protection from liability. Limited partners legally may have no say in managing the business. If this requirement is violated, the limited partnership status is dissolved.

Limited partnerships are usually found in real estate, dentistry, and various international arrangements. A limited partner has limited liability, being liable for loss only up to the amount of capital invested.

Joint Venture:

Sometimes a number of individuals and businesses join together in order to accomplish a specific purpose or to complete a single transaction. For example, they may wish to purchase a building in down-town Boston and resell it for profit. This would be called a joint venture. Wheeling Pittsburg Steel Corporation formed a joint venture with Japans Nisshia Steel Company for the purpose of manufacturing steel in the United States and selling it around the world. Hewlett Packard (U.S.) and Samsung (South Korea) have also initiated a joint venture.

The Partnership Contract – for Business Ownership:

The business practice dictates that a partnership agreement be written and signed, although that is not a legal requirement. Such a contractual agreement is called articles of partnership. Written articles of partnership can prevent or lessen misunderstandings at a later date, Oral partnership agreements, though quite legal, tend to be hard to recreate and are open to misunderstandings. Written articles of partnership provide proof of an agreement.

A written partnership agreement includes the following main features:

  • Name of the business partnership
  • Type of business
  • Location of the business
  • Expected life of the partnership
  • Name of the partners and the amount of each one’s investment
  • Procedures for distributing profits and covering losses
  • Amounts that partners will withdraw for services
  • Duties of each partner
  • Procedures for dissolving the partnership.

Advantage of a Partnership:

More Capital: In the sole proprietorship, the amount of capital is limited to the personal wealth and credit of the owner. In a partnership, the amount of capital may increase significantly.

Combined Managerial Skills: In a partnership, people with different talents and skills may join together. One partner may be good at marketing; the other may be expert at accounting and financial matters. Combining these skills could provide a greater chance of success.

Clear Legal Status: Over the years, legal precedents for partnerships have been established through court cases. The questions of rights, responsibilities, liabilities, and partner duties have been covered. Thus the legal status of the partnership is clearly understood; lawyers can provide sound legal advice about partnership issues.

Ease of Starting: Because it involves a private contractual arrangement, a partnership is fairly easy to start. It is nearly as free from government regulation as a sole proprietorship. The cost of starting a partnership is low; it usually involves only a modest legal fee for drawing up a written agreement, which highly desirable.

Disadvantage of Partnership:

Unlimited Liability: Each general partner is liable for a partnership’s debts. Suppose Millar and Steven partnership fails with outstanding bills of $20000. This amount must be paid by someone. If Millar lacks the personal assets to pay the debt and Steven has the money, he has to pay off the debts. This is one reason for choosing partners carefully.

Investment Withdrawal Difficulty: A person who invests money in a partnership may have a hard time withdrawing the investment. It is easier to invest in a partnership than to withdraw. The money typically considered a “frozen investment” is tied up in the operation of the business.

Potential Disagreements: Decision made by several people (partners) is often better than those made by one. However, having two or more people deciding on some aspect of the business can be dangerous. Power and authority are divided, and the partners will not always agree with each other. As a result poor decision may be made.

Other Unincorporated Forms of Business Ownership:

Besides proprietorships and partnerships, several other forms of ownership do not require incorporation. These forms are used by people who want to join together to accomplish various objectives without going to the trouble of forming a corporation.

  • Syndicates
  • Business Trusts

Syndicates:

Syndicate is an association of two or more businesses joined together to accomplish specific business goals; a popular form in underwriting large amounts of corporation stocks. Syndicates engage in financial transactions. Unlike a joint venture, a syndicate need not be dissolved after the transaction is completed. Members of syndicate can sell their ownership interest to buyers.   

Business Trusts:

Business trust is a business used to hold securities for investors; allows the transfer of legal title to a property of one person for the use and benefit of another. The original name for this form of business was the Massachusetts trust.

The trustees issue shares, called trust certificates, to investors. These shares show that the holder has transferred funds to a trustee and has the legal right to benefit from the success of the trust investments.

3. Corporations – Forms of Business Ownership :

Corporation is a business that is a legal entity separate from its owners. Some industries, such as automobile manufacturing, computer manufacturing, oil refining, and natural gas production, require millions of dollars to operate a business. Typically such vast sums of money are put together by attracting numerous investors. The unincorporated forms of business – the proprietorship and the partnership – do not attract investors who do not want to make decisions or to be actually involved in managing the firm. In the eyes of the law, the corporation is an artificial being, invisible and intangible. It has the legal rights of an individual: it can own property, purchase goods and services, and sue other persons or corporations. 

Forming a Corporation:

The legal status of a corporation stems from a charter, which is a state issued document authorizing its formation. The individuals forming the corporation are called its incorporators. A corporation that conducts business in the state in which it is chartered is known as a domestic corporation. A corporation doing business in a state other than the one in which it is incorporated is called a foreign corporation.

Most states require that at least three persons join together to form a corporation. The applicants fill out an application form for a charter (articles of incorporation); the form is then reviewed by the appropriate government officials. After the charter has been granted, the incorporators and all subscribers or the owners of the stock of the business meet and elect a board of directors. They also approve the bylaws of the corporation, if this is a state requirement. The board of directors then meets to select the professional managers and to make any other decisions needed to start the business.

The corporation has relationships with various groups. Included in the corporation’s domain of operation are shareholder, creditors, customers, and employees. The actual owners of the business are the shareholders, those who have invested their money. The corporation is run by professional managers who plan, organize, control, and direct the activities needed to sell goods and services to customers.

Types of Corporation:

In reality, corporations come in many sizes and types.

  • Private Corporation
  • Public Corporation
  • Closed Corporation
  • Open Corporation
  • Municipal Corporation
  • Domestic Corporation
  • Foreign Corporation
  • Alien Corporation
  • Non-profit Corporation
  • Single Individual Corporation