type of ownership in business plan example

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

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.

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.

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.

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.

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

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.

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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Business Plan Tutorial: Types of Business Ownership for 2024

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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Starting a business is a big decision that comes with a lot of challenges. The first challenge business owners face is deciding the ownership structure they want to use.  This structure will be heavily influenced by the type of business ownership employed. 

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Each business ownership type has its unique advantages and disadvantages which contribute to the decision-making process. Understanding ownership is essential before setting up your own business. Let's take a closer look.

What is business ownership?

Business ownership provides a management framework for business owners. Thus, understanding the various types of ownership is essential to these folks.

Business ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions.

The legal structure of a business is crucial in its ramifications, so it must be understood and planned out carefully. The decisions involved impact daily operations, taxation, and the level of risk.

The legal structure is the framework through which a business is defined in a particular jurisdiction.

Types of business ownership structures

There are six basic types of business ownership structures:

Sole Proprietorship

Partnership

Private limited companies (LTD)

Public Limited Companies, PLC

Not-for-profit organisation

• Cooperatives.

Let's examine the structures in a bit more detail, along with some advantages and disadvantages of each.

1. Sole proprietorship

This is the most common form of business ownership and the simplest. Sole proprietorship means that a business is owned and directed by one individual. This individual owns all the rights to run the business however they deem fit. In other words, if you start a brand new business, and you are the only person owning and running the business, it is considered a sole proprietorship ( sole trader ).

Advantages of a sole proprietorship

All income earned belongs to the sole proprietor, who also owns all business assets.

It is the simplest of all the business structures to set up.

It provides the proprietor with flexibility in running the business.

The sole proprietor gets to make all business decisions.

Absence of corporate tax.

Disadvantages of a sole proprietorship

The proprietor bears personal responsibility for all business debt and losses.

There is little to differentiate between personal and business income.

Raising capital is the responsibility of the sole proprietor.

2. Partnership

This business ownership structure means two or more people own a business. Partnerships are of two types, namely:

General partnership - this involves an investment from all partners, and all partners bear the responsibility for any debt incurred by the business. The partnership usually doesn’t need a formal agreement as it could be verbal between business owners.

Limited Liability Partnership, LLP - LLP provides protection for each partner against debt incurred by the other partner(s). It usually requires a formal agreement between partners to protect each from the actions of the others.

Advantages of partnership

Business capital can be easily generated from each partner's resources.

Profits from services offered by the business are shared between partners.

Ownership and decision making are shared by partners .

Greater capacity for loans.

Disadvantages of partnership

Partners are responsible for losses or debt incurred by the business.

The risk of friction among partners can be high.

Partners can be held liable for the actions of other partners.

3. Private limited company/LTD

A private limited company - also referred to as LTD - is an incorporated business entity that is privately held and controlled. The ownership of the business is divided by shares in the company. Those who own the shares are known as shareholders.

This type of business ownership provides limited liability to the owners. Limited liability provides the shareholders' personal assets with protection from liabilities incurred by the business.

Advantages of private limited companies

Private limited companies provide limited liability to their shareholders.

Shares cannot be sold to the public (the current owners decide to whom they will sell them). Therefore the company is protected from loss of ownership and control.

Due to incorporation, LTDs can continually exist even after the death of an owner.

Disadvantages of private limited companies

Shares can only be sold in-house, and can’t be traded with the public.

It is expensive to set up due to administrative and legal costs.

They must be registered with the company registrar.

Legal paperwork is necessary for starting up an LTD.

4. Public Limited Company/PLC

A public limited company - also known as PLC - is a business ownership style unique to the United Kingdom, although it is equivalent to what is known as corporation in other countries. A PLC is an incorporated business, meaning it exists legally as a separate entity from its owners. It also has limited liability, as it offers protection to its shareholders from business liabilities.

A PLC is managed by a board of directors and owned by shareholders. A PLC's shares can be traded with the public on the stock exchange.

Advantages of limited liability companies

Capital can be easily generated through trading shares publicly.

Owners have limited liability.

Publicly listing shares makes it easier to attract investors.

Disadvantages of limited liability companies

Anyone who can afford to buy a share can be a shareholder .

A board of directors is needed to run the organisation.

They are exposed to public scrutiny and regulations.

They may be at risk of a takeover if someone buys up a majority of the shares available.

5. Non-Profit

A non-profit organisation has been established for purposes other than profit generation. The organisation's generated income does not go to the owners or members. Examples include Amnesty International and the Boy Scouts.

Advantages of a non-profit organisation

It easily attracts talent interested in the mission of the organisation.

Non-profit organisations are exempt from paying corporate income tax if they meet the necessary criteria.

Owners of the organisation are protected from personal liability.

Disadvantages of a non-profit organisation

Raising funding for projects can be complicated.

Non-profit organisations can face immense pressure from stakeholders.

The financial spending of the organisation is open to scrutiny from the public.

6. Cooperative

A cooperative is a business structure whose owners are consumers of its services. It is operated to provide benefits to those people. It often aims to pursue economic, social, or cultural goals.

Examples of cooperatives include community-owned stores and farms such as Anglia Farmers or supporter-led sports clubs.

Advantages of cooperatives

They are relatively easy to start.

Management style is democratic, with each member having voting rights.

Funding is internal, hence responsibility is shared among members.

Disadvantages of cooperatives

Independent of the amount invested, all members have equal voting rights.

There is a limit to sharing dividend payments.

There is the risk of rigid business practices.

Over-reliance on internally generated funds.

Factors to consider in choosing a business structure

In choosing a business structure best suited to your business, the following factors should be considered:

1. Start-up finance

The cost of setting up a business increases proportionally to the amount of legal paperwork. One important factor to consider when choosing a business structure is the amount of money you are willing to invest in the initial setup costs.

2. Number of owners

The amount of owners you are willing to involve in the management of your business is also an important factor to consider. Then you can custom-fit your business ownership structure to one of the many available - whether for one or 100 owners.

3. Liabilities

The need to protect your personal assets from debt makes business risk and liability an important consideration. Sole proprietorships and certain types of partnerships face unlimited liability, meaning that the owners are personally liable for any debts the business incurs.

On the other hand, incorporated companies have limited liability, meaning the owners are not personally liable for the company's debt. For owners looking to build a business with limited liability, a limited liability company or a corporation might be best .

4. Business ownership transfer

A sole proprietorship rarely outlives its owner. Considering whether you want your business to keep running after you are gone is also important. If you are looking to pass ownership to your family or children, the kind of business ownership structure you choose will be absolutely crucial.

Business ownership examples

Real-world business ownership examples by type:

• Partnership: "IDEO" is a design and innovation consulting firm that started as a partnership.
• Private Limited Companies: "Atlassian" is a private limited company that provides collaboration, development, and issue-tracking software.
• Public Limited Companies, PLC : "Walmart" is a public limited company that operates a chain of discount department stores.
• Non-for-profit Organisation: "Salvation Army" is a not-for-profit organization that provides social services, including food and shelter, to the homeless.
• Cooperatives: "Ocean Spray" is a cooperative of cranberry farmers that markets and sells cranberry juices and other products.

Now let's take a look at some examples in more detail!

Public Limited Company example

General Motors has a public limited company structure, meaning that its shares can be traded publicly. The company specializes in automobiles, and it is ranked amongst the top ten Fortune 500 companies. It is the parent company to famous brands like Chevrolet, Cadillac, and Opel.

Partnership example

Red Bull decided to create a partnership with GoPro, as the two lifestyle brands have shared interests. Both brands are about adventure, a fearless approach, and lots of action. Under the terms of the agreement, Red Bull will receive ownership interest in GoPro, and GoPro will become the exclusive supplier of point-of-view imaging technology for Red Bull's media productions and events.

In conclusion, there are six business ownership structures, each with its own advantages and disadvantages. Depending on the type of business you are looking to run, the structure you employ will be a major factor in the success of your business entity.

Business Ownership - Key takeaways

Ownership of a business refers to the legal control over a business. It gives the owner or the legal capacity to dictate the business operations and dealings.

There are six major business ownership structures namely:

• Sole Proprietorships
• Partnerships
• Private limited companies
• Public limited companies
• Non-Profit organisations
• Sole proprietorship, partnership, and limited liability companies are the most common business ownership structures.

Each form of business comes with its own set of advantages and disadvantages.

• Start-up finance
• Number of owners
• Liabilities
• Business ownership transfer.
• Fig. 3 - An external view of the Gemeral Motors building (https://www.wikiwand.com/en/General_Motors_Canada#Media/File:GeneralMotorsCanada3.jpg) by Raysonho (https://commons.wikimedia.org/wiki/User:Raysonho) is licensed by (https://creativecommons.org/publicdomain/zero/1.0/deed.en)

Flashcards in Business Ownership 19

Business ownership refers to legal control over a business. It gives the owner the legal capacity to dictate the business operations and dealings. 

What is the simplest business ownership structure?

Sole proprietorship 

Cooperative is a form of business ownership structure?

List the basic forms of business ownership structure 

Sole Proprietorship 

Partnership 

Corporations 

Limited Liability Companies, LLC

Cooperatives 

Give two disadvantages of sole proprietorship 

1. The proprietor is bears responsibility for all business debt and losses 

2. There is mostly little to differentiate between personal and business income 

Explain sole proprietorship

Sole Proprietorship involves a business being owned and directed by an individual. The individual owns all the rights to run the business however he/she deems fit. 

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Frequently Asked Questions about Business Ownership

Business (company) ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions. 

What are the 6 basic forms of business ownership? 

There are six most common forms of business ownership:

Sole Proprietorship 

Partnership 

Cooperatives. 

What is the most common form of business ownership? 

Sole proprietorship is the most common form of business ownership and the simplest. 

What are the factors that determine business ownership? 

There are four factors to consider while choosing business ownership, and they are: 

• Business ownership transfer

Which is the simplest type of business ownership? 

Sole proprietorship is the simplest type of business ownership.

What does PLC mean in business?

PLC in business means Public Limited Company, and it is a business ownership structure unique to the United Kingdom. It is equivalent to what is known as corporations in other countries. It has limited liability, as it offers protection to its shareholders from business liabilities.  

Test your knowledge with multiple choice flashcards

Profits generated from non-profit corporations are shared among the board 

Not for profits organization legal entities that 

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Forms of Businesses: Advantages, Limitations, and Example

When starting a business, one of the fundamental decisions to make is determining the type of business ownership. The choice of business ownership structure can have significant implications for various aspects, including legal responsibilities, tax obligations, management control, and liability protection. Understanding the different types of business ownership is essential for entrepreneurs and aspiring business owners to make informed decisions about their ventures.

9 Forms of Businesses

Forms of Business Ownership In this guide, I will explore the various forms of business ownership commonly encountered in the business world. I will delve into the characteristics, advantages, and disadvantages of each ownership structure to help you gain a comprehensive understanding of your options. By exploring the types of business ownership, you’ll be better equipped to choose the structure that aligns with your goals, preferences, and the nature of your business.

Sole proprietorship

Partnership, limited liability company, c corporation, s corporation, b corporation, close corporation, nonprofit corporation, cooperative, debt and liability, partners or investors, hiring employees.

• Intentions – Profit or Cause

A sole proprietorship is the simplest and most common form of business ownership. In this structure, a single individual owns and operates the business. Here’s an overview of a sole proprietorship, along with its advantages, disadvantages, and an example:

• Easy and inexpensive to set up
• Direct control over business decisions
• Retention of all profits
• Simplified tax reporting

Disadvantages

• Unlimited personal liability for business debts.
• Limited access to external funding.
• Sole responsibility for all aspects of the business.
• Lack of continuity without a succession plan.

Sarah runs a small bakery called “Sweet Delights.” She owns and operates the business on her own, preparing and selling a variety of pastries and baked goods. Sarah is responsible for everything, from baking to marketing, managing finances, and interacting with customers. All profits and losses from Sweet Delights are reported on Sarah’s personal tax return, and she has unlimited liability for any debts or legal issues the business may encounter.

Also Read: Partnership

Partnership is a type of business ownership where two or more individuals, known as partners, come together to establish and operate a business. Let’s delve into the concept of partnerships, exploring their advantages, disadvantages, and real-life example.

• Shared responsibilities and decision-making.
• Access to a wider pool of skills, knowledge, and resources.
• Shared financial burden and risk.
• Ability to bring complementary expertise and perspectives.
• Shared liability for business debts and legal obligations.
• Potential for disagreements and conflicts between partners.
• Lack of centralized decision-making authority.
• Limited ability to raise capital compared to corporations.

John and Mary form a partnership to open a marketing agency. They contribute their respective skills and expertise, share the workload, and make joint decisions. Both partners are personally liable for the agency’s debts, but they benefit from shared responsibilities and the pooling of resources to grow their business.

A Limited Liability Company (LLC) is a legal business entity that combines elements of a corporation and a partnership or sole proprietorship. It provides limited liability protection to its owners, known as members, shielding their personal assets from the company’s debts and legal liabilities.

• Limited personal liability for business debts and obligations.
• Flexible management structure and decision-making.
• Pass-through taxation, avoiding double taxation.
• Ability to attract investors by offering ownership interests.
• More complex and costly to establish and maintain compared to sole proprietorships or partnerships.
• Formalities and regulatory requirements vary by jurisdiction.
• Potential for disputes and conflicts between members.

Jane and Mike form an LLC to open a restaurant. As members of the LLC, they enjoy limited liability protection, shielding their personal assets from business liabilities. They have flexibility in managing the restaurant and can allocate profits and losses according to their agreed-upon ownership interests. The LLC structure provides them with favorable tax treatment, and they can also bring in additional investors by offering membership interests in the company.

Also Read: Sole Proprietorship

C corporation is a legal business entity that is separate and distinct from its owners or shareholders. It is one of the most common forms of business structure in the United States. The name “C corporation” comes from the subchapter C of the Internal Revenue Code, which outlines the tax rules for this type of entity.

• Limited liability protection for shareholders, separating personal assets from business debts and liabilities.
• Ability to raise capital by selling shares of stock to investors.
• Perpetual existence, allows the corporation to continue its operations even with changes in ownership.
• Potential for tax advantages, such as deductible business expenses and the ability to provide employee benefits.
• Double taxation is when a company is taxed on the money it makes, and then the people who own shares in the company are also taxed on the money they receive as dividends. It’s like getting taxed twice on the same money.
• More complex and costly to establish and maintain compared to other business structures.
• Formalities and compliance requirements, including regular shareholder meetings, record-keeping, and filing separate tax returns.
• Less flexibility in profit allocation and ownership structure compared to other entities.

Examples of well-known C corporations include large publicly traded companies like Apple , Microsoft , and Coca-Cola .

An S corporation, or S corp, is a legal business structure in the United States that provides certain tax benefits while offering limited liability protection to its shareholders. It is named after Subchapter S of the Internal Revenue Code, which governs the tax rules for this type of entity.

• Pass-through taxation is a system where the profits and losses of a company are directly included in the tax returns of its owners. This helps to prevent paying taxes twice on the same money. It’s like when you share a pizza with your friends and each person only pays for their own slices, instead of paying for the whole pizza separately.
• Potential tax savings by avoiding self-employment taxes on the portion of income classified as distributions.
• Ability to have up to 100 shareholders who must be U.S. citizens or residents, allowing for a more closely held and controlled business structure.
• Stricter eligibility requirements include restrictions on the number and type of shareholders, only one class of stock, and specific ownership limitations.
• Limited ability to raise capital compared to C corporations, as S corporations cannot issue different classes of stock or have non-U.S. resident shareholders.

XYZ Corporation is an S corporation in the consulting industry with actively involved shareholders. The structure provides limited liability protection, safeguarding personal assets. The corporation benefits from pass-through taxation, avoiding double taxation and potentially reducing self-employment taxes for shareholders. However, eligibility requirements limit the number and type of shareholders, affecting capital raising and foreign investments. Despite these restrictions, the S corporation structure proves advantageous for XYZ Corporation and its shareholders in the consulting industry, offering tax benefits and liability protection.

For more details, refer to  C Corporation Vs S Corporation

B Corporation, also known as a Benefit Corporation, is a type of business entity that aims to balance both profit generation and social/environmental impact. Here are the advantages and disadvantages of a B Corporation, along with an example:

• B Corporations have a legal obligation to consider the impact of their decisions on various stakeholders, including employees, communities, and the environment. This allows businesses to align their mission and values with their operations, promoting sustainable practices and positive social impact.
• By becoming a B Corporation, businesses gain legal protection for their social and environmental commitments. Shareholders and directors are shielded from legal action by stakeholders if decisions are made in line with the company’s stated mission and values.
• Corporations typically have additional reporting and transparency requirements compared to traditional business entities. They are required to undergo a rigorous assessment and meet specific performance standards set by B Lab, the nonprofit organization that certifies B Corporations.

The popular ice cream company Ben & Jerry ‘s is structured as a B corporation.

Close Corporation, also known as a closely held corporation or a closely held company, is a type of business entity that combines features of both a corporation and a partnership. Here are the advantages and disadvantages of a Close Corporation, along with an example:

• Close Corporations provide more flexibility and control compared to larger publicly traded corporations. Shareholders have greater involvement in decision-making and can maintain a close-knit ownership structure.
• Close Corporations can have a hard time getting money because they usually can’t sell their shares to the public. They can only ask a small group of people who already own shares or some private investors for money.

A family-owned restaurant operating as a Close Corporation is an example of this business structure. The restaurant is owned and operated by a small group of family members who have direct involvement in the daily operations and decision-making processes. The Close Corporation structure allows the family to maintain control over the business while benefiting from limited liability protection. However, they may face challenges in raising significant capital or expanding the ownership to non-family members due to the restrictions associated with this structure.

A nonprofit corporation is a type of organization that operates for charitable, educational, religious, or social purposes, rather than for financial gain. Here are the advantages and disadvantages of a nonprofit corporation, along with an example:

• Nonprofit corporations typically enjoy tax-exempt status, meaning they are exempt from paying certain taxes at the federal, state, and local levels. This allows nonprofits to allocate more resources toward their mission and programs.
• Nonprofits often benefit from public trust and support due to their mission-driven nature. People are more inclined to donate or volunteer for organizations that are dedicated to making a positive impact on society.
• Nonprofit corporations can’t give money or benefits to individuals or shareholders. Instead, any extra money they have has to be put back into their programs and projects. It’s kind of like when you have some extra allowance money and instead of spending it on yourself, you use it to buy things for your school or community.

The American Red Cross is a well-known example of a nonprofit corporation. The organization is dedicated to providing humanitarian aid, disaster relief, and support to individuals and communities in need. As a nonprofit, the American Red Cross benefits from tax-exempt status, which allows them to raise funds and allocate resources to its mission of saving lives and alleviating suffering. However, they must adhere to regulatory requirements and rely on public support to sustain their operations.

A cooperative is a business entity owned and operated by a group of individuals who come together to meet their common economic, social, and cultural needs. Here are the advantages and disadvantages of a cooperative, along with an example:

• Cooperatives are democratically controlled, with each member having an equal say in the decision-making process. This fosters a sense of ownership and empowerment among members.
• When a cooperative makes money, the people who are part of it can share in that money in different ways. They can get dividends (which are like rewards) or patronage refunds (which are like getting some money back). This allows members to benefit directly from the cooperative’s success.
• Cooperatives may face challenges in raising capital as they primarily rely on member contributions and retained earnings. Acquiring external funding can be difficult, which can restrict their growth potential.
• Decision-making in cooperatives can be time-consuming and prone to conflicts among members with differing opinions or priorities. Achieving consensus on critical matters may require extensive communication and negotiation.

Organic Valley is a cooperative society consisting of organic farmers across the United States. It focuses on sustainable agriculture practices, producing organic dairy products, eggs, meat, and vegetables.

How to Choose Suitable Forms of Businesses?

Considering and keeping in mind the following points will assist you in selecting the right form of business:

Usually, small businesses and startups go for a sole proprietorship or partnership firm. And obviously takes upon them the entire liability. However, if you are in a high-risk business, or want to limit your liability, then you can go for a more formal structure. A formal structure requires more paperwork and costs more to establish.

If one wants to keep the taxes separate from the business, then one should go for a corporation form of business. And, if one does not mind filing the business profits/expenses on his own personal tax returns, then one can go for a sole proprietorship form of business.

As we know, a sole proprietorship is a single-owner form. Hence, If there is more than one investor or partner, then the first stage alternate is to go for a partnership form of business. One will have to start a partnership, an LLC, or a limited partnership in such a case.

Unlike sole proprietorships, a formal business structure makes it easier to hire more employees down the road. Though an entity can always change its business form whenever they want, it is always better to have a plan ready.

Intentions – Profit or Cause

If the primary objective is to help others and not make a profit, then one should form a non-profit business. Such businesses get tax-exempt status and require less paperwork.

Once we have answered all the above questions and decided on the business form that one wants, the next step should be to check the local and state laws. Knowing the laws fully will help one a great deal in running the business smoothly.

From the simplicity of a sole proprietorship to the complexities of a corporation or a cooperative, each ownership structure offers unique features that can significantly impact the way a business operates and grows. Factors such as legal liability, taxation, decision-making authority, and the ability to raise capital can vary based on the chosen ownership type. Whether you are a sole entrepreneur, considering a partnership, or exploring the idea of forming a corporation or limited liability company, this guide will provide you with the necessary insights to make an informed decision. It’s important to understand that the choice of business ownership is not one-size-fits-all and should be tailored to your specific circumstances and goals.

RELATED POSTS

• Advantages and Disadvantages of Partnership
• Unlocking Potential: 15 Reasons to Embrace Change in Ownership Stake
• Advantages and Disadvantages of Sole Proprietorship
• C Corporation Vs S Corporation
• Advantages and Disadvantages of Limited Liability Company
• Subsidiary Company

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Business Ownership Structures & Legal Implications

When forming a business, its legal structure is one of the owner’s most important practical decisions. Each type of structure has its own benefits and considerations that are affected by the business' size, the number of owners and employees, the industry, and other variables. Each state passes its own business formation laws, and not all states allow for every type of business structure. This means that the requirements for forming a particular type of business vary from state to state.

Sole Proprietorships

A sole proprietorship is the simplest kind of business. Most sole proprietorships are small businesses that have one employee — the owner. Forming a sole proprietorship is usually easy. In fact, in many states it requires no special action. Doing freelance or independent work under your own name is usually enough to form a sole proprietorship.

Two major benefits of structuring your business as a sole proprietorship are simplicity of formation and taxes. Since there usually are no formal steps required to form a sole proprietorship, there is no cost involved. Also, owners of sole proprietorships count the business’ income on their personal income tax returns. One drawback is that sole proprietorships do not offer any legal protection to their owners.

Partnerships

When two or more people start a business together, they can form a partnership. There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships. In addition, joint ventures have some aspects of partnerships. The amount of money contributed, control exerted over the business, and legal liability vary depending on which type of partnership is formed.

To form a partnership, most states require partners to register the business with the secretary of state. It is also important for the partners to formalize their relationship in a partnership agreement, which is a contract that addresses the major aspects of the business, including how it will be run, how profits are split, and what to do in the case of dissolution.

Consulting a lawyer experienced in business formation will give a business owner or potential owner a better understanding of each business structure in the context of their unique business situation. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.

Corporations

There are generally two types of corporations: C corporations and S corporations. Larger businesses with multiple employees are often structured as C corporations, whereas many smaller businesses choose to organize as S corporations. The primary difference between an S and C corporation is how taxes are paid. C corporations are taxed as independent entities. The income of an S corporation “passes through” to the individual tax returns of its owners. An LLC may choose to treat itself as an S corporation for tax purposes.

Non-Profit Organizations

The basic definition of a non-profit organization is a business that does not pass on excess revenue to owners, shareholders, or other investors. Instead, a non-profit uses this money to further its mission, which includes paying the salary of its owners and other employees.

Many non-profit organizations choose to incorporate to obtain federal and state tax exemptions, grants, and other benefits. One of the most common types of non-profit organizations is a 501(c)(3), named after a section of the IRS code, but there are other types.

Discover answers to frequently asked questions about business operations and formation.

Franchises are not a traditional business structure like the ones described above. A franchise is a business that licenses the name, logo, trade secrets, or other aspects of an existing business. For example, most fast food restaurants are franchises. In many cases, a person starting a franchise forms an LLC, partnership, or S corporation, and that company becomes the entity that pays the larger company for the right to use the name.

Last reviewed October 2023

Small Business Legal Center Contents   

• Small Business Legal Center
• First Steps in Starting a Business & Legal Formation
• Sole Proprietorships Under the Law
• General Partnerships Under the Law
• Limited Partnerships Under the Law
• Limited Liability Partnerships (LLPs) Under the Law
• Limited Liability Companies (LLCs) Under the Law
• Non-Profit Corporations Under the Law
• Franchises Under the Law
• Cooperatives Under the Law
• Benefit Corporations & Hybrid Entities Under the Law
• C Corporations Under the Law
• Close Corporations Under the Law
• Joint Ventures Under the Law
• S Corporations Under the Law
• Hiring and Managing Employees & Relevant Legal Considerations
• Business Management, Growth, and Related Legal Concerns
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• Small Business

10 Types of Business Ownership and Classifications

Updated Aug. 5, 2022 - First published on May 18, 2022

By: Elizabeth Gonzalez

When you’re looking to launch a new venture or take your existing small business to a higher level, it’s important to choose an ownership structure that can support your goals. The main considerations when choosing a structure for your business are simplicity, liability, control, financing, and taxes.

Here are the 10 types of business ownership and classifications:

• Sole proprietorship
• Partnership
• C corporation
• S corporation
• Nonprofit corporation
• Benefit corporation

Common types of business ownership

In addition, social entrepreneurs can choose from nonprofit corporations as well as benefit corporations and low-profit limited liability companies (L3Cs). States provide different business structures with unique requirements and privileges.

Some states, for example, provide special structures for professional firms such as professional LLCs (PLLCs) and professional corporations (PCs). Before making any decisions about your business structure, you’ll want to investigate the specific laws of your state.

It’s possible to form your business in a state other than your home state where the laws and small business taxes are more advantageous. This is not a simple decision, however, so you would want to do your research and talk to legal and financial advisors before making that call.

1. Sole Proprietorship

Sole proprietorship is the default structure of a business that hasn’t filed any paperwork to create a legal entity. It is the simplest form of business ownership, and the structure of choice for four out of five small business owners with no employees.

Advantages of a sole proprietorship

Sole proprietorship is a simple ownership type with several advantages, including the following:

• Simplicity: In most cases, sole proprietors operating under their own names can simply get to work without filing paperwork with the state. Sole proprietorships may be exempt from certain licensing and registration requirements such as obtaining a business license to sell online . This makes sole proprietorship the simplest and least expensive among the different types of business ownership.
• Control over the business: A sole proprietorship is owned by a single person. There’s no need to get consensus before making decisions about the business: It’s all yours.
• Pass-through taxation: Profits from a sole proprietorship pass through to the owner’s personal income, simplifying taxes significantly. As a pass-through entity, a sole proprietorship qualifies for the 20% qualified business income (QBI) deduction established under the 2017 Tax Cuts and Jobs Act. Tax software can help you ensure that you’re getting all of the tax credits and deductions your business qualifies for.

Disadvantages of a sole proprietorship

Sole proprietorships do have their disadvantages compared to other types of ownership.

• Legal liability: A sole proprietorship passes more than income through to its owner. Legally, the two are inseparable. That means any lawsuits or other claims against the business are launched personally against the owner. As a sole proprietor, you’re putting your personal assets on the line every day that you operate your business.
• Financial risk: In addition to legal risks, sole proprietors take on all financial risk of the business personally. Your home, bank accounts, cars, and other assets can be seized to satisfy claims by creditors if your business hits a rough patch financially.
• Access to funding: Because of their informal structures, sole proprietorships generally have a harder time accessing loans and investment capital than other business ownership types. This can make it difficult to provide competitive benefits such as small business health insurance .

2. Partnerships

Partnerships, often called general partnerships , are businesses with more than one owner. If you team up on a business venture without forming a legal business entity through the state, your business is a partnership by default.

While they don’t require formation paperwork, there may be limitations on naming a partnership in your state, which may necessitate filing a “doing business as” (DBA) name . Partnerships are usually founded on formal partnership agreements outlining the ownership share, rights, and obligations of each partner.

Partnerships are a popular type of company ownership for professional firms.

Advantages of a partnership

Partnerships provide some notable advantages, including:

• Simplicity: Partnership is a relatively simple structure since it doesn’t require formation paperwork. Depending on the number of partners and the terms of your agreement, they can also be relatively simple to run.
• Pass-through taxation: Partnerships are pass-through entities , with income passing through to partners proportionally based on share of ownership. If your partnership is split evenly down the middle, for example, 50% of the business’s profits would pass through to each partner’s personal income. Partnerships qualify for the 20% QBI deduction.
• Control over the business: Partnerships allow their owners to participate in the business directly and allocate profits and control according to their own wishes. New partners can be brought in relatively easily.

Disadvantages of a partnership

Following are some drawbacks of partnerships:

• Legal liability: Like sole proprietorships, partnerships open the partners up to legal liability for the firm’s operations. Liability insurance can address these risks, but insurance has limits.
• Financial risk: Partners also take on financial liability for the business, putting their personal assets at risk in case of financial hardship or bankruptcy.

3. Limited Liability Partnership (LLP)

An LLP is a legal entity available in some states to provide the simplicity and pass-through taxation of a partnership while limiting liability for the partners. In addition to a formal operating agreement among partners, LLPs generally require registration with the secretary of state.

Where available, they are a popular type of business entity with professionals such as doctors, lawyers, accountants, architects, and engineers.

Advantages of an LLP

LLPs provide their owners with many advantages, including:

• Limited liability: Like an LLC, an LLP is a separate legal entity with its own assets and obligations. This protects partners from personal liability for legal and financial claims against the firm, although the degree of protection varies by state. Generally, the partners’ liability is limited to their investments in the firm. Partners may still be liable for their own personal errors and misconduct, so liability insurance is generally still required.
• Ownership and control: Like partnerships, LLPs allow owners to actively participate in the business and control how it is run.
• Tax options: LLPs may be considered pass-through entities, which can be advantageous for owners, particularly with the 20% QBI deduction. Their tax treatment varies by state, however.

Disadvantages of an LLP

Some limitations of LLPs include:

• Limited availability: LLPs are not available in every state, and they may only be available to certain types of businesses.
• Increased complexity: Because LLPs are treated differently in different states, partners will need to research their state requirements and tax laws thoroughly before choosing this structure.

You can explore business ownership types and requirements in any state by visiting the secretary of state website. Image source: Author

4. Limited Liability Company (LLC)

An LLC is a legal entity formed by creating an LLC operating agreement and filing articles of organization with the secretary of state. LLCs allow business owners to retain some of the advantages of sole proprietorship while limiting legal and financial liability, making them a popular business ownership structure for small businesses.

When evaluating the advantages of sole proprietorship vs LLC , be sure to weigh all the pluses and minuses.

Advantages of an LLC

Limited liability is one of several benefits provided by an LLC:

• Limited liability: When you form an LLC, you create a separate legal entity with its own assets and obligations. Any legal claims against the business remain against the business, not its owners. Members of an LLC may still be liable for their personal conduct, however, so liability insurance is generally advised.
• Active ownership: LLCs allow ownership by two or more members who can exert as much control and involvement in the business as they like.
• Tax options: LLCs are pass-through entities , which can be advantageous for owners, particularly with the 20% QBI deduction. But LLCs also provide additional flexibility by allowing members to choose to be taxed as a corporation instead (see “corporations,” below). This is generally advantageous to larger firms, but it gives LLCs flexibility as the business grows.

Disadvantages of an LLC

Following are some of the limitations of LLCs:

• Complexity: LLCs must be formed by filing articles of formation with the state. You also have ongoing regulatory paperwork to attend to, including maintaining a registered agent to receive legal documents and filing periodic reports where required with the state. All of this adds up to extra administrative time and complexity.
• Administrative costs: An LLC costs more to create and maintain than a sole proprietorship. State filings generally require fees, and you may need software or support to complete them. You may need extra legal and financial guidance to ensure that you’re getting the most out of your choices as well, which can further add to the costs.

5. Series LLC

Currently available in 18 states and counting, series LLCs are an up-and-coming type of business ownership structure. Basically, they allow one parent LLC to form multiple internal LLCs in subsidiary fashion. These nested LLCs can be used to isolate liability for different business units.

Series LLCs are complex, but worth discussing with your advisors if your business has distinct units that might benefit from individual treatment.

Advantages of a series LLC

Series LLCs provide numerous benefits, including:

• Really limited liability: Each LLC within a series has separate members, assets, and liabilities.
• Active ownership: Series LLCs allow owners to actively participate in the operation of their individual LLCs.
• Tax options: Series LLCs retain the tax advantages and flexibility of traditional LLCs.
• Unified filing: Despite the multiple LLCs, a series LLC is required to register and file taxes just once through the parent LLC. The registrations and returns must encompass all LLCs, however, so they are still more complicated than a single LLC.

Disadvantages of a series LLC

Series LLCs have the following limitations:

• Complexity: Despite the unified filing setup, it’s considerably more complex to manage multiple LLCs with separate assets and owners than a single entity. Taxes in particular are complicated by the series structure.
• Administrative costs: The added administrative burden means additional cost and guidance from professional advisors. In addition, fees may be higher for forming a series LLC.

6. C Corporation

A corporation is owned by shareholders who may have varying levels of control and involvement in the everyday operations of the business. In the case of stock corporations, ownership is issued in shares of stock.

A corporation is formed by filing articles of incorporation with the state. The process of incorporation includes appointing a board of directors to oversee the business and establishing bylaws for its governance.

With governance managed through a board of directors and ownership distributed among shareholders, corporations represent a further degree of separation between the business entity and its owners.

By default, corporations are C corporations, so called because they are taxed under Subchapter C of the Internal Revenue Code (IRC). Unlike sole proprietorships, partnerships, and LLCs, C corporations are not pass-through entities.

Profits belong to the corporation and are subject to corporate income tax. They may also be distributed through dividends to shareholders.

Advantages of a C corporation

With their formal governance and ownership structures, corporations can sustain any level of growth. Generally, the structure becomes advantageous as a business grows larger. Some of the advantages include the following:

• Limited liability: Like an LLC, a corporation is a separate legal entity with assets and liabilities of its own. The liability of its shareholders is generally limited to the amount they have invested in the business.
• Self-employment taxes: Shareholders who work in the business are paid and taxed as employees, sparing them from self-employment tax. Income can be kept in the business as equity and distributed through shares and dividends, providing greater financial flexibility.
• Access to capital: C Corporations can access capital by issuing stock. They can make unlimited stock offers to individuals or businesses, including foreign or domestic investors. They can also issue multiple types of stock.

Disadvantages of a C corporation

Incorporation also has the following drawbacks:

• Regulatory oversight: Corporations are subject to greater scrutiny than LLCs, being required to disclose earnings, governing documents, and other information annually to shareholders and in some cases the public.
• Corporate tax: The profits of C corporations are subject to corporate tax. Shareholders who work in the business and take a salary, as well as shareholders who earn dividends, also pay personal income tax on their earnings. This results in two layers of taxation on the business’s profits.
• Complexity and costs: Corporations are more complex and costly to form and maintain than other business entities.
• Less control: Because ownership is spread among shareholders, and governance among a board of directors, corporations make it harder to exert individual control over the business.

7. S Corporation

Some corporations can enjoy the benefits of pass-through taxation by electing to be taxed as an S corporation. To qualify, the corporation may not have more than 100 shareholders and may issue only one class of stock.

Only individuals, certain estates and trusts, and certain tax-exempt organizations may own shares in an S corporation.

An S corporation is formed through the same steps as a C corporation, with an additional election made through a filing with the Internal Revenue Service.

Advantages of an S corporation

The advantages of an S corporation include:

• Limited liability: Like all corporations, S corporations limit the owners’ personal liability for the business’s debts and legal obligations.
• Access to funding: S corporations can attract investment capital and other funding.
• Pass-through taxation: S corporations qualify for pass-through taxation, which can reduce the tax burden for individual shareholders as well as for the business.

Disadvantages of an S corporation

Some of the drawbacks of S corporations include the following:

• Higher startup costs: Like any corporation, S corporations cost more to start and operate than LLCs and sole proprietorships.
• Increased complexity: S corporations must regularly report earnings and other information to shareholders.
• Limits on ownership: S corporations may be owned only by individuals who are U.S. citizens or residents, and they can issue only one type of stock.

8. Nonprofit Corporation

Most nonprofits are formed as corporations that apply for tax-exempt status under Section 501(c) of the IRC. Their entity formation process is the same as that of other corporations, with articles of incorporation filed with the secretary of state, a board of directors, and bylaws for governance.

Nonprofits may be formed solely for the tax-exempt purposes specified in Section 501(c), however, and they are subject to specific regulatory requirements in each state.

Contrary to popular belief, nonprofits can and should generate profits. The difference between a nonprofit entity and a for-profit entity is how those profits are invested. Rather than being distributed to shareholders, profits are reinvested in the nonprofit’s operations to serve its charitable mission.

Advantages of a nonprofit corporation

Nonprofit corporations provide significant advantages, including:

• Liability protection: Nonprofit corporations provide the same limits on liability as other corporations, protecting you from personal liability for the nonprofit’s operations.
• Tax exemption: Nonprofits may qualify for exemption from federal taxes as well as many state and local taxes. This allows nonprofits to stretch their budgets and apply maximum resources toward their missions. Federal tax exemption is not a blanket exemption from all taxes, however. Nonprofits that achieve federal tax-exempt status generally need to apply separately for exemption from state and local taxes such as sales tax.

Disadvantages of a nonprofit corporation

Some of the limitations of nonprofit corporations include the following:

• Limited activities: Nonprofits must limit their activities to the pursuit of charitable purposes.
• Limited access to funding: Nonprofit organizations rely on grants and charitable contributions to fund their operations.
• Increased regulatory oversight: In addition to the usual duties of corporations, nonprofits have unique registration and reporting requirements to manage at the state and federal levels.

9. Benefit corporation

Benefit corporations are corporations formed to serve a public benefit in addition to the usual corporate mission of earning profits. They are structured like other corporations with a board of directors and bylaws, yet the board is responsible for measuring and reporting on its social impact as well its financial performance.

Benefit corporations are an increasingly popular structure for entrepreneurs who want to do good while doing business.

Advantages of a benefit corporation

Benefit corporations provide the following advantages:

• Limited liability: Like any other corporation, a benefit corporation limits its shareholders’ liability for financial and legal claims.
• Access to funding: Benefit corporations can take advantage of investor capital and revenue from commercial activities to accomplish their social missions.
• Profit distribution: Like other corporations, benefit corporations can distribute profits to shareholders as dividends.

Disadvantages of a benefit corporation

Following are some of the drawbacks of a benefit corporation:

• Varying regulations: Benefit corporations are currently available in 35 states. This map from B Lab shows where they are available. Each state has its own rules for what types of social benefits qualify and how they must be measured and reported, which means additional complexity in forming and running the business.
• Increased regulatory oversight: Benefit corporations must meet all of the usual regulatory requirements of corporations plus report on their social and financial impact annually to shareholders.
• Corporate tax: Benefit corporations are subject to federal corporate income tax.

10. Low-Profit Limited Liability Company (L3C)

L3C is a relatively rare business type that combines the legal structure of an LLC with the charitable mission of a nonprofit. An L3C can distribute modest profits to its members, yet this must always be secondary to the primary purpose of furthering a charitable mission.

L3Cs may not be formed for political or legislative purposes.

L3Cs were conceived as an investment vehicle for foundations, which must give 5% of their assets to a charitable program or program-related investment (PRI) each year. That plan ran into some hurdles with the IRS, however, and the L3C structure has not been widely adopted as a result.

Advantages of an L3C

An L3C offers some advantages:

• Liability protection: L3Cs provide the same limits on liability as LLCs, protecting you from personal liability for the business’s operations.
• Flexible ownership: Members of an L3C can maintain ownership and control and actively participate in the day-to-day operations of the business.
• Pass-through taxation: L3Cs qualify for pass-through taxation.

Disadvantages of an L3C

Following are limitations of an L3C:

• Lack of tax exemption: L3Cs do not qualify for federal tax-exempt status, and are therefore less attractive than incorporation for social enterprises.
• Regulatory uncertainty: Because the IRS has not officially sanctioned L3Cs as PRIs for foundations, their usefulness and longevity are uncertain. They are currently permitted in only nine states.

Choose the best ownership type for your business

As you can see, every business structure poses different benefits and limitations. To find the best option for your situation, you’ll need to answer fundamental questions about your business.

What is your vision for running the company? How big is your business now, and what are your business development plans? What are your corporate and personal tax rates and how do the various options shake out for your bottom line?

What kind of funding do you need? Once you’ve answered those questions, consult with your legal and financial advisors to ensure that you set your business up for long-term success.

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Elizabeth Gonzalez is a legal and regulatory expert writing for The Ascent and The Motley Fool.

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7 types of business ownership to consider in 2024

Teresa Bitler

Sierra Campbell

“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.

Published 8:08 a.m. UTC Jan. 29, 2024

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How you set up your business can have major consequences, from how easy it is to operate on a day-to-day basis to how you pay your taxes. It can also determine whether you are personally liable if your business is sued and how, or even if you can raise funds by selling stocks. That’s why it’s crucial to choose the right business structure for you and your business.

To help you make the best decision, we’ve provided an overview below of the seven different types of business ownership you’ll want to consider, along with their pros and cons and what makes them the best choice for certain types of businesses.

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Business ownership types at a glance

7 common types of business ownership

1. sole proprietorship.

A sole proprietorship is an unincorporated business entity that is operated by a single person. Because it lacks a formal corporate structure, a sole proprietorship is simple to set up and operate. In most cases, you can start one without fees and without filing any paperwork unless you intend to use a fictitious name (DBA). Technically, you don’t even need a separate bank account for your business since any profits or losses pass through to you on your personal income taxes. 

However, a sole proprietorship comes with a major risk: personal liability. Without a business entity separating you from your business, not only do profits and losses pass through to you, but your business’ liabilities do, too. 

“If your business gets into hot water, so do you,” said Jon Morgan, CEO of Venture Smarter, a consulting firm specializing in startups and small businesses. “No one wants to risk their car, house or that vintage record collection they’ve been curating since college.”

• Easy setup with little to no paperwork.
• Profits pass directly to owner.
• Owner makes all the decisions.
• No liability protection.
• Insurance necessary to protect personal assets.
• Unable to bring on investors.

2. Partnership

A partnership is similar to a sole proprietorship except that two or more individuals co-own the business. Who controls the business and how much liability each partner has depends on the type of partnership you decide to form. 

For example, a general partnership equally divides the management of the business, its profits and any liability between the partners. Conversely, a limited partnership allows one partner to have most or all the control and liability while the other partner has limited or no control and liability. 

Limited liability partnerships (LLPs) fall somewhere in between, allowing partners to remain equal but sheltering their personal assets from the business and from each other. For example, if an attorney in a law office commits malpractice, a limited liability partnership would protect the other partners from repercussions.

• Easy and inexpensive to set up.
• Simple to operate, with pass-through taxation.
• Partners can pool talents and resources. 
• No liability protection, depending on structure.
• Dissolves if one partner leaves or dies.
• Potential for conflict between the partners.

3. C corporation

Corporations are businesses that exist as a separate entity from their owners. Unlike a sole proprietorship or partnership, a corporation is legally liable for its actions and can live on after the death or departure of its owners. While there are several types of corporations, most large business entities are C corporations or C corps. 

Named in reference to Subchapter C of Chapter 1 of the Internal Revenue Code, C corps are owned by shareholders and pay corporate income tax directly to the IRS. Instead of profits and losses passing through to owners (shareholders), C corps pay taxes to the IRS and profits are then divided among the shareholders. The shareholders are then taxed on what they earn from the business. 

Despite this double taxation of the business and the shareholders, C corps have several advantages over other types of business entities. First, they can have an unlimited number of investors, including foreign investors. They can also issue more than one class of stock. 

• Provides limited liability.
• Company exists in perpetuity.
• Unlimited shareholders, including foreign investors.
• Can offer more than one class of stock.
• More complicated to set up.
• Required to have shareholder and director meetings.
• Corporate profits subject to double taxation. 

4. S corporation

While an S corporation, or S corp, is also a separate entity that offers shareholders liability protection, it doesn’t pay taxes to the IRS like a C corp. Rather, an S corp’s profits and losses pass through to its shareholders, who are taxed on their personal income tax. This avoids the double taxation shareholders experience with a C corp.

An S corp also has several constraints that a C corp does not, such as having no more than 100 shareholders. The business must be U.S.-based, and shareholders must be U.S. residents. Finally, S corps can only issue one class of stock, and some entities, including certain financial institutions and insurance companies, are ineligible to operate as an S corp. 

• No double taxation. 
• Provides liability protection.
• Allows for business to issue stocks.
• Complicated to set up.
• Restrictions on shareholders.
• More difficult to manage than LLC.

5. Limited liability company

A limited liability company (LLC) combines the best of sole proprietorships, partnerships and corporations. Easy and inexpensive to set up, it offers the liability protection of a corporation without the complicated regulations or shareholders that come with one. As with a sole proprietorship or partnership, profits and losses pass through to the owners in proportion to their percentage of ownership, and they claim earnings on their income taxes.

In addition to liability protection, LLC status lends a business a certain level of credibility. “Hobbyists don’t have LLCs,” said attorney Steve Replin. “Only serious business people have gone to the trouble of creating their own LLC.” 

On the other hand, an LLC can limit your business since it can’t raise funds or issue stocks. If you plan to go public, a corporation might be a better option.  

• Liability protection.
• Easy to operate.
• Business credibility.
• More expensive to operate.
• Owners responsible for self-employment taxes.
• Can’t issue stocks or raise funds.

6. Nonprofit corporation

Nonprofit corporations are formed to do charity, educational, religious, literary or scientific work, not to enrich their members. Because of this, nonprofits don’t pay state or federal income taxes, but to maintain their tax-exempt status, they must adhere to strict rules about what they can do with their profits. For example, they can’t distribute profits to members. Instead, nonprofits must direct their profits toward charitable goals. 

Most nonprofits are organized as corporations and apply for tax-exempt status under Section 501(c) of the Internal Revenue Code. Like other corporations, they file articles of incorporation with the secretary of state where they are located, have bylaws and hold regular board meetings.  

• Tax-exempt status.
• Able to further a cause.
• Eligible for public and private grants.
• Extensive paperwork.
• Intense IRS scrutiny.
• Expensive to maintain. 

7. Cooperatives

Typically referred to as a co-op, a cooperative is an association of people, organizations or businesses designed to benefit those using its services. A common example is a food co-op that sells food items to its consumer members at lower prices. Similarly, farmers can form a co-op to purchase supplies as a group and to share equipment. 

Members become part of a co-op by purchasing shares, and they either pay for the goods and services or volunteer their labor (i.e., stocking shelves at the food co-op) in exchange for them. 

Not all co-ops generate a profit, but those that do divide profits equally among their members, all of whom have one vote regardless of how many shares they hold. Because everyone gets an equal say, decision-making can take longer than it might in other types of business structures. However, this is offset by co-op’s tax-exempt status on federal and most states’ income taxes. 

• Pooled resources.
• Operate to benefit members.
• No federal income tax.
• Slow decision-making process.
• Not the most profitable type of business entity.

Which business structure is best for your business?

Determining which business structure is best for your business depends on five main factors: 

• Your industry.
• How much paperwork you can tolerate.
• Personal liability.
• Fundraising.

Industry 

Certain businesses lend themselves to one type of business ownership over another. For example, real estate investment companies favor setting up an LLC because it provides liability protection. Additionally, federal and state laws prohibit some businesses from using certain business structures. 

Sole proprietorships and partnerships require minimal paperwork, while corporations, including nonprofits, land at the other end of the spectrum. If you want to keep things simple, stick to a sole proprietorship, partnership or even an LLC. 

Personal liability 

With sole proprietorships and partnerships, liability passes through to the business owner or owners. This puts your personal assets at risk, although you can purchase liability insurance to protect against this. 

The type of business ownership you choose will affect how your business’ profits are taxed. For example, a C corp pays taxes on its profits and distributes the money to its shareholders, who then pay income tax on their gains. In a sole proprietorship, the profits pass through to the owner’s personal income tax. 

Fundraising 

Some types of business ownership allow you to fundraise, while others don’t. For example, an LLC can’t issue stocks, but an S corp can. On the other hand, an S corp is limited by the number of shareholders it can have and whether it can accept foreign investments, while a C corp is not. 

Although it is important to choose the right type of business ownership initially, it is possible to change it if you realize you made the wrong choice or if your company outgrows its current structure. Just beware that the process could have tax ramifications and unintentionally cause the dissolution of your business. 

Frequently asked questions (FAQs)

There are many things to consider when choosing the right business structure for you. One of the most important is whether you want to create a barrier between you and your company or whether you want income (and liability) to pass through to you. 

You’ll also want to think about fundraising since only certain business structures can issue stocks.

According to the Internal Revenue Service, the most common types of business structures are:

• Sole proprietorships.
• Partnerships.
• Corporations.
• S corporations.
• Limited liability companies (LLCs).

Corporations have much less risk than sole proprietorships and partnerships because they are separate entities from their owners, who do not have personal liability. In contrast, if your sole proprietorship or partnership is sued, the liability flows through to you personally, risking your business, home, savings and other possessions. 

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy . The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Teresa Bitler has over 10 years of experience writing about personal finance and real estate as well as consumer and business product reviews. Her work has appeared at CreditCards, The Penny Hoarder, Yahoo, MSN, HuffPost, U.S. News & World Report, Moving, and Personal Real Estate Investor.

Sierra Campbell is a small business editor for USA Today Blueprint. She specializes in writing, editing and fact-checking content centered around helping businesses. She has worked as a digital content and show producer for several local TV stations, an editor for U.S. News & World Report and a freelance writer and editor for many companies. Sierra prides herself in delivering accurate and up-to-date information to readers. Her expertise includes credit card processing companies, e-commerce platforms, payroll software, accounting software and virtual private networks (VPNs). She also owns Editing by Sierra, where she offers editing services to writers of all backgrounds, including self-published and traditionally published authors.

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4 Ownership structures and legal forms

Businesses not only vary in size and industry but also in their ownership. Some are owned by just one person or a small group of people, some are owned by large numbers of shareholders, some are owned by charitable foundations or trusts, and some are even owned by the state. Different ownership structures overlap with different legal forms that a business can take. A business’s legal and ownership structure determines many of its legal responsibilities, including the paperwork that the owners need to complete in order to set up the business, the taxes the business has to pay, how profits from the business are distributed, and the owners’ personal responsibilities if the business makes a loss or goes bankrupt.

It is not necessary to go into great detail on legal forms and ownership structures here but a short overview will help you to appreciate the diversity of businesses. At the broadest level it is possible to distinguish between organisations that are owned and run by private owners, those that are owned and run by the state and those that are run by voluntary organisations. Here we will first look at different types of privately owned businesses.

Legal forms and ownership structures of businesses are different from country to country. In the United Kingdom the majority of businesses (but not all) are sole traders, limited companies or business partnerships (UK Government, n.d.).

• Sole trader – a person who is running a business as an individual. Sole traders can keep all the business’s profits after paying tax on them but they are personally responsible for any losses the business makes (i.e. they would have to cover them out of their private money if necessary), paying the bills incurred by the business (e.g. stock or equipment), and keeping a record of all sales and expenditures. Sole traders can take on employees – the term implies that they own the business on their own, not that they must work there alone.
• Limited company – an organisation set up by its owners to run their business. A limited company is a legal person . Of course, a company is not a person in the sense we commonly understand it. What the term means is that the law regards a limited company as having the same legal standing as a person, i.e. it has legal rights and obligations in itself, which are independent from the rights and obligations of its owners as individuals. For example, a limited company can own property. A limited company’s finances are separate from the finances of its owners. Any profit made after taxes belongs to the company. The company can then share its profits, most commonly among all the owners. Limited companies have ‘members’, i.e. the people who own the shares. A limited company also has ‘directors’. Directors may be share owners but they don’t have to be. Shareholders’ and directors’ responsibilities for the company’s financial liabilities (such as losses or debts) are limited to the value of their shareholdings. This means that they do not have to pay out of their personal income or assets if the company runs into financial difficulties. There are two main types of limited company: private limited companies and public limited companies. The shares of public limited companies (PLCs) are traded in the stock market, where anybody can buy shares in the company if they wish to do so. Private limited companies are not traded in the stock market and other people can only buy shares in them with the approval of the current owners (for example, if they are invited to invest in the company by the current owners).
• Business partnerships – an arrangement where two or more individuals share the ownership of a business. There are two main types of partnership: general partnerships and limited partnerships. In a general partnership all partners are personally responsible for the business, meaning they are liable for any losses or debts with their personal income or wealth if necessary. In a limited partnership partners are not personally liable if the business incurs any losses or debts. Profits from a partnership are shared between the partners and each partner then pays taxes on their share. There are a lot of fine details and several possible permutations in the structure of business partnerships, which are important when setting one up but need not concern us any further here.

There are some other legal ownership structures for businesses in the UK (including some different laws relating to partnerships in Scotland) but the three introduced above are the most common. Similar business ownership structures exist in many other countries although the precise legal implications can differ in important ways.

Legal and ownership structures, business size and industry sector are not entirely independent of each other. For example, most sole traders tend to be small businesses, not least because a single individual rarely has the financial capacity to finance a very large business, nor the desire to be personally liable with all that they own if a large business were to run into financial troubles. Certain industry sectors require large businesses. For example, it is not viable to run a small steel works because the physical and financial investment required are so large. In other cases, industry sector and legal form are closely related. For example, law firms and some other professional service firms with more than one professional working in them in the United Kingdom are legally required to be set up as partnerships and no other ownership or legal structure is permitted.

Types of Business Ownership: Everything You Need to Know

It is important that you choose the right structure for your business as the type of structure you choose will affect how your business is organized, taxed, and handled. 6 min read updated on February 01, 2023

Updated August 17, 2020:

Types of Business Ownership : Everything You Need to Know

There are different types of business ownership that you will need to know before you can determine how you want to structure your business. Below are your choices when it comes to running your business: sole proprietorship , partnership, limited partnership, limited liability company (LLC), corporation (for-profit), nonprofit corporation , and cooperative. It is important that you choose the right structure for your business as the type of structure you choose will affect how your business is organized, taxed, and handled.

Sole Proprietorship

A sole proprietorship is a one-person business that is not generally registered with the state. Advantages are that it is rather easy and straightforward to form, you need not worry about other opinions as you are the sole operator of your business, and there is very little government regulation on sole proprietorships. Some disadvantages include limited resources to financing, the business ends when the owner dies, and any losses must be specified on the owner’s personal tax return, meaning that the owner is personally liable for the company’s debts and obligations.

Partnership

There are generally two types of partnerships , including a general and limited partnership. There are benefits and disadvantages to each one, particularly in terms of the tax implications and business structure for managers, members, and shareholders.

General Partnership. This type of business structure is created by 2 individuals, each of whom will operate as partners in the business. Each partner will have personal liability in the event that the other partner fails to pay any debts or losses. Furthermore, both partners will be held personally liable to the partnership itself. In order to create a general partnership, the partners can simply draft a verbal or written agreement stating that they intend to enter into a general partnership . There are no specific guidelines that must be adhered to with this type of business structure, as the partners are free to operate the company as they see fit. Note that this type of business structure is quite popular for those specializing in law or medicine.

Limited Partnership. Limited partnerships , or limited liability partnerships , are created when 2 or more individuals come together to form a partnership in which each partner is liable only for the amount of money each one invested into the business.

An LLC , or a limited liability company , is an attractive business structure for those not wanting to have any personal liability for the company’s losses. An LLC carries many benefits, including the ability to operate as a sole person through a company in which you have no personal financial ties to the losses that your company may incur. Therefore, should you lose a significant amount of money through your LLC, you will not be held personally liable, thus, your personal assets are protected at all time. Furthermore, creating an LLC can help you gain popularity with the public if selling your services or goods. It can also help you obtain loans or financial assistance should you need help.

LLCs are formed under state laws - which vary state by state - when an individual files the Articles of Organization with the Secretary of State’s office in the state you choose to register. A name availability check can be conducted on the Secretary of State’s website in order to ensure that the name is not currently being used. An LLC business owner is required to report any changes in address, membership, or service and must also file an annual report that includes important business and financial information.

LLC owner s can choose to be taxed as a sole proprietorship, corporation, or partnership, which is another benefit to forming an LLC . There may be certain tax deductions that an LLC owner can use that cannot be deducted through a DBA. On the contrary, the DBA confers no special income tax status, meaning the owner must pay taxes in accordance with its own filing status.

For-profit Corporation

Simply put, a corporation is treated as a person as the corporation can itself initiate legal suits or be sued, buy/sell real estate, and even break the law, i.e. fraud. Specifically, there are two types of corporations , including S corporations and C corporations .

S corporations are known as “pass-through” entities for tax purposes. C corporations are viewed as entirely independent entities from the owners and managers. Before you determine which type of corporation to operate, you’ll want to consider the benefits to each type of corporation . The main difference between the two is the tax implications that come with operating each type of corporation.

The tax difference is simple: Owners of C corporations are taxed on income received, and nothing else. Therefore, any leftover profits of the C corporation after being taxed are not then taxed to the owners. However, this is the opposite for S corporations in that owners of S corporations are in fact taxed, hence why these types of entities are referred to as “pass-through” tax entities.

Regardless of whether you choose to operate an S or C corporation, there are many benefits to owning a for-profit corporation, including the fact that a business owner can use the business to file lawsuits and buy property. Furthermore, incorporating is simple and straightforward. Therefore, it won’t take you long or cost that much to incorporate your S or C corporation. As a business owner, you can deduct normal and ordinary business expenses from your income. In the event that you choose to transfer ownership of your corporation, you can easily do this with no hassle. Should you choose to issue stocks to shareholders, you can do so with ease. There are several benefits to owning a for-profit corporation, so be sure to look at the specific details before determining what type of corporation you want to own.

Nonprofit Corporation

A nonprofit organization is one that operates to benefit the general public. While such corporations can be established to benefit certain populations, i.e. the handicap, mentally ill, animal population, etc., the goals are similar in that the nonprofit organization works to serve the interests of the public. Benefits of creating a nonprofit corporation include several tax exemptions , particularly if you operate a 501(c)(3) nonprofit; eligibility to apply for and obtain private/public grants; and several other benefits that overall assist the nonprofit in its daily operations at a much lower cost.

While nonprofits are generally organized as corporations, they can also be formed as LLCs in certain states, including Delaware, California, Michigan, Minnesota, and Texas. While LLCs do not have tax-exempt status, a nonprofit operating as an LLC generally does so long as the LLC elects to be treated as a corporation for tax purposes. Furthermore, the LLC must have a nonprofit purpose, which some states simply don’t allow. For example, some states require that when a business registers as an LLC, the application must state the purpose of the business.

Nonprofits don’t have a specific economic purpose but are rather charitable organizations organized to serve the needs of the public. Therefore, certain states simply do not allow nonprofits to register as LLCs. It is important to note that on a federal level, the IRS will not give a nonprofit LLC tax -exempt status unless all of the members are tax-exempt organizations themselves. For example, if four tax-exempt charities come together to create a nonprofit LLC, then the LLC will benefit from federal tax exemptions.

A syndicate is a self-organizing group of people or businesses that form together to transact specific business or to promote a common interest.

Organic Growth

Organic growth is the process of business' expansion due to an increasing customer base, output per customer, and/or through new sales.

If you need help choosing which type of business you want to own, 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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• Types of Business Structures
• LLC vs. Nonprofit
• Why Form an LLC
• Legal Form of Organization in Business Plan
• Types of Companies LLC
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• Types of Business Entities
• LLC Tax Benefits
• Best Type of Corporation for Small Business
• LLC Partnership Corporation
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Starting a business is a big decision that comes with a lot of challenges. The first challenge business owners face is deciding the ownership structure they want to use.  This structure will be heavily influenced by the type of business ownership employed. 

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Each business ownership type has its unique advantages and disadvantages which contribute to the decision-making process. Understanding ownership is essential before setting up your own business. Let's take a closer look.

What is business ownership?

Business ownership provides a management framework for business owners. Thus, understanding the various types of ownership is essential to these folks.

Business ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions.

The legal structure of a business is crucial in its ramifications, so it must be understood and planned out carefully. The decisions involved impact daily operations, taxation, and the level of risk.

The legal structure is the framework through which a business is defined in a particular jurisdiction.

Types of business ownership structures

There are six basic types of business ownership structures:

Sole Proprietorship

Partnership

Private limited companies (LTD)

Public Limited Companies, PLC

Not-for-profit organisation

• Cooperatives.

Let's examine the structures in a bit more detail, along with some advantages and disadvantages of each.

1. Sole proprietorship

This is the most common form of business ownership and the simplest. Sole proprietorship means that a business is owned and directed by one individual. This individual owns all the rights to run the business however they deem fit. In other words, if you start a brand new business, and you are the only person owning and running the business, it is considered a sole proprietorship ( sole trader ).

Advantages of a sole proprietorship

All income earned belongs to the sole proprietor, who also owns all business assets.

It is the simplest of all the business structures to set up.

It provides the proprietor with flexibility in running the business.

The sole proprietor gets to make all business decisions.

Absence of corporate tax.

Disadvantages of a sole proprietorship

The proprietor bears personal responsibility for all business debt and losses.

There is little to differentiate between personal and business income.

Raising capital is the responsibility of the sole proprietor.

2. Partnership

This business ownership structure means two or more people own a business. Partnerships are of two types, namely:

General partnership - this involves an investment from all partners, and all partners bear the responsibility for any debt incurred by the business. The partnership usually doesn’t need a formal agreement as it could be verbal between business owners.

Limited Liability Partnership, LLP - LLP provides protection for each partner against debt incurred by the other partner(s). It usually requires a formal agreement between partners to protect each from the actions of the others.

Advantages of partnership

Business capital can be easily generated from each partner's resources.

Profits from services offered by the business are shared between partners.

Ownership and decision making are shared by partners .

Greater capacity for loans.

Disadvantages of partnership

Partners are responsible for losses or debt incurred by the business.

The risk of friction among partners can be high.

Partners can be held liable for the actions of other partners.

3. Private limited company/LTD

A private limited company - also referred to as LTD - is an incorporated business entity that is privately held and controlled. The ownership of the business is divided by shares in the company. Those who own the shares are known as shareholders.

This type of business ownership provides limited liability to the owners. Limited liability provides the shareholders' personal assets with protection from liabilities incurred by the business.

Advantages of private limited companies

Private limited companies provide limited liability to their shareholders.

Shares cannot be sold to the public (the current owners decide to whom they will sell them). Therefore the company is protected from loss of ownership and control.

Due to incorporation, LTDs can continually exist even after the death of an owner.

Disadvantages of private limited companies

Shares can only be sold in-house, and can’t be traded with the public.

It is expensive to set up due to administrative and legal costs.

They must be registered with the company registrar.

Legal paperwork is necessary for starting up an LTD.

4. Public Limited Company/PLC

A public limited company - also known as PLC - is a business ownership style unique to the United Kingdom, although it is equivalent to what is known as corporation in other countries. A PLC is an incorporated business, meaning it exists legally as a separate entity from its owners. It also has limited liability, as it offers protection to its shareholders from business liabilities.

A PLC is managed by a board of directors and owned by shareholders. A PLC's shares can be traded with the public on the stock exchange.

Advantages of limited liability companies

Capital can be easily generated through trading shares publicly.

Owners have limited liability.

Publicly listing shares makes it easier to attract investors.

Disadvantages of limited liability companies

Anyone who can afford to buy a share can be a shareholder .

A board of directors is needed to run the organisation.

They are exposed to public scrutiny and regulations.

They may be at risk of a takeover if someone buys up a majority of the shares available.

5. Non-Profit

A non-profit organisation has been established for purposes other than profit generation. The organisation's generated income does not go to the owners or members. Examples include Amnesty International and the Boy Scouts.

Advantages of a non-profit organisation

It easily attracts talent interested in the mission of the organisation.

Non-profit organisations are exempt from paying corporate income tax if they meet the necessary criteria.

Owners of the organisation are protected from personal liability.

Disadvantages of a non-profit organisation

Raising funding for projects can be complicated.

Non-profit organisations can face immense pressure from stakeholders.

The financial spending of the organisation is open to scrutiny from the public.

6. Cooperative

A cooperative is a business structure whose owners are consumers of its services. It is operated to provide benefits to those people. It often aims to pursue economic, social, or cultural goals.

Examples of cooperatives include community-owned stores and farms such as Anglia Farmers or supporter-led sports clubs.

Advantages of cooperatives

They are relatively easy to start.

Management style is democratic, with each member having voting rights.

Funding is internal, hence responsibility is shared among members.

Disadvantages of cooperatives

Independent of the amount invested, all members have equal voting rights.

There is a limit to sharing dividend payments.

There is the risk of rigid business practices.

Over-reliance on internally generated funds.

Factors to consider in choosing a business structure

In choosing a business structure best suited to your business, the following factors should be considered:

1. Start-up finance

The cost of setting up a business increases proportionally to the amount of legal paperwork. One important factor to consider when choosing a business structure is the amount of money you are willing to invest in the initial setup costs.

2. Number of owners

The amount of owners you are willing to involve in the management of your business is also an important factor to consider. Then you can custom-fit your business ownership structure to one of the many available - whether for one or 100 owners.

3. Liabilities

The need to protect your personal assets from debt makes business risk and liability an important consideration. Sole proprietorships and certain types of partnerships face unlimited liability, meaning that the owners are personally liable for any debts the business incurs.

On the other hand, incorporated companies have limited liability, meaning the owners are not personally liable for the company's debt. For owners looking to build a business with limited liability, a limited liability company or a corporation might be best .

4. Business ownership transfer

A sole proprietorship rarely outlives its owner. Considering whether you want your business to keep running after you are gone is also important. If you are looking to pass ownership to your family or children, the kind of business ownership structure you choose will be absolutely crucial.

Business ownership examples

Real-world business ownership examples by type:

• Partnership: "IDEO" is a design and innovation consulting firm that started as a partnership.
• Private Limited Companies: "Atlassian" is a private limited company that provides collaboration, development, and issue-tracking software.
• Public Limited Companies, PLC : "Walmart" is a public limited company that operates a chain of discount department stores.
• Non-for-profit Organisation: "Salvation Army" is a not-for-profit organization that provides social services, including food and shelter, to the homeless.
• Cooperatives: "Ocean Spray" is a cooperative of cranberry farmers that markets and sells cranberry juices and other products.

Now let's take a look at some examples in more detail!

Public Limited Company example

General Motors has a public limited company structure, meaning that its shares can be traded publicly. The company specializes in automobiles, and it is ranked amongst the top ten Fortune 500 companies. It is the parent company to famous brands like Chevrolet, Cadillac, and Opel.

Partnership example

Red Bull decided to create a partnership with GoPro, as the two lifestyle brands have shared interests. Both brands are about adventure, a fearless approach, and lots of action. Under the terms of the agreement, Red Bull will receive ownership interest in GoPro, and GoPro will become the exclusive supplier of point-of-view imaging technology for Red Bull's media productions and events.

In conclusion, there are six business ownership structures, each with its own advantages and disadvantages. Depending on the type of business you are looking to run, the structure you employ will be a major factor in the success of your business entity.

Business Ownership - Key takeaways

Ownership of a business refers to the legal control over a business. It gives the owner or the legal capacity to dictate the business operations and dealings.

There are six major business ownership structures namely:

• Sole Proprietorships
• Partnerships
• Private limited companies
• Public limited companies
• Non-Profit organisations
• Sole proprietorship, partnership, and limited liability companies are the most common business ownership structures.

Each form of business comes with its own set of advantages and disadvantages.

• Start-up finance
• Number of owners
• Liabilities
• Business ownership transfer.
• Fig. 3 - An external view of the Gemeral Motors building (https://www.wikiwand.com/en/General_Motors_Canada#Media/File:GeneralMotorsCanada3.jpg) by Raysonho (https://commons.wikimedia.org/wiki/User:Raysonho) is licensed by (https://creativecommons.org/publicdomain/zero/1.0/deed.en)

Flashcards in Business Ownership 19

Business ownership refers to legal control over a business. It gives the owner the legal capacity to dictate the business operations and dealings. 

What is the simplest business ownership structure?

Sole proprietorship 

Cooperative is a form of business ownership structure?

List the basic forms of business ownership structure 

Sole Proprietorship 

Partnership 

Corporations 

Limited Liability Companies, LLC

Cooperatives 

Give two disadvantages of sole proprietorship 

1. The proprietor is bears responsibility for all business debt and losses 

2. There is mostly little to differentiate between personal and business income 

Explain sole proprietorship

Sole Proprietorship involves a business being owned and directed by an individual. The individual owns all the rights to run the business however he/she deems fit. 

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Frequently Asked Questions about Business Ownership

Business (company) ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions. 

What are the 6 basic forms of business ownership? 

There are six most common forms of business ownership:

Sole Proprietorship 

Partnership 

Cooperatives. 

What is the most common form of business ownership? 

Sole proprietorship is the most common form of business ownership and the simplest. 

What are the factors that determine business ownership? 

There are four factors to consider while choosing business ownership, and they are: 

• Business ownership transfer

Which is the simplest type of business ownership? 

Sole proprietorship is the simplest type of business ownership.

What does PLC mean in business?

PLC in business means Public Limited Company, and it is a business ownership structure unique to the United Kingdom. It is equivalent to what is known as corporations in other countries. It has limited liability, as it offers protection to its shareholders from business liabilities.  

Test your knowledge with multiple choice flashcards

Profits generated from non-profit corporations are shared among the board 

Not for profits organization legal entities that 

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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Julia is a writer in New York and started covering tech and business during the pandemic. She also covers books and the publishing industry.

Kelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist covering small business marketing content. She is a former Google Tech Entrepreneur and she holds an MSc in International Marketing from Edinburgh Napier University. Additionally, she is a Columnist at Inc. Magazine.

How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

Free business plan templates and examples

Kickstart your business plan writing with one of our free business plan templates or recommended tools.

Free business plan template

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One-page plan template

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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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.

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