A business owner is the legal custodian of a business. The ownership rights offer control over the business management.
Different types of ownerships offer different advantages and disadvantages. While a few structures offer financial benefits, others offer legal protection of limited liabilities.
Let us discuss what a business owner and its different forms with their advantages and disadvantages is.
What is a Business Owner?
A business owner is the legal proprietor of the business. It can be an individual, a business, or a group of entities.
A business owner is legally responsible for the ownership of a business’s assets, liabilities, and equity. Therefore, a business owner is primarily concerned with the profit and losses of the business.
For public or listed companies, the term ownership is interchangeable with a shareholder. A shareholder is also the owner of a listed company. However, the ownership rights change with the percentage of shares held.
For most businesses, a business owner is also responsible for the executive management of the business. The top management responsibilities include managing capital, cash flow, profits, expenses, and compliance of the business.
Types of Business Owner
Shareholders can be classified as common shareholders and preferred shareholders. These types of business owners receive dividends and play their respective roles in business management.
The types of business owners can be classified according to the entity structure as it defines the roles and responsibilities of the business owners clearly.
When only one person owns a business, it is called a sole proprietorship. It is the default ownership status of a business.
This type of business owner has several advantages and disadvantages.
- It is the simplest ownership type and requires little formal documentation.
- The business owner keeps full control of the business.
- The owner gets the pass-through taxes. It means the profits or losses of the businesses are passed on to the owner. The income tax applies only once.
A few disadvantages of this sole proprietorship include:
- It comes with unlimited liability for the owner.
- The loss of investment and other financial risks remain with the owner only.
- It may come with higher income tax liability.
When two or more business owners join hands, it is called a partnership. A general or simply partnership also requires limited paperwork.
By default, when there are two or more owners of a business, it will be called a partnership.
Advantages of a partnership for owners include:
- Business owners retain control over business management, financials, and other activities.
- It also comes with a pass-through tax structure.
- It requires little formal documentation and is a simple business structure.
Some limitations of partnerships include:
- Partnerships come with unlimited legal liabilities for owners.
- Pass-through taxes may impose higher liability.
- The financial risks of the business remain with the owners.
Limited Liability Partnership (LLP)
A refined ownership structure of a partnership comes in the form of a limited liability partnership (LLP). The owners keep control of the business while their legal liability is limited.
Thus, an LLP ownership combines the benefits for a partnership and an LLC.
Advantages of an LLP ownership include:
- Owners keep control of the business.
- Owners come with limited legal liability of the business.
- LLPs also offer pass-through tax advantages to the owners.
Some limitations of the LLP structure include:
- It requires complex documentation and legal paperwork.
- It is not available in all states and jurisdictions.
- It may limit the legal participation of owners.
Limited Liability Company (LLC)
A limited liability company offers combined benefits of sole proprietorship and limited liability for owners. A sole proprietor can formally structure a business by separating the business’s legal liabilities with an LLC structure.
Some advantages of an LLC include:
- Owners keep full control of the business.
- Owners reduce their legal liabilities.
- Owners enjoy reduced income tax rates with a pass-through structure.
A few disadvantages of LLC are:
- An LLC structure is costly as it requires more legal formalities.
- It is a complex business structure.
- It comes with more administrative costs as well.
When a business is incorporated to separate the business’s legal entity from its owners, it is called a corporation.
A-C Corporation is the default structure for incorporated businesses. It requires filing for the article of incorporation under section C of the IRC.
Advantages of a C Corporation include:
- The business can issue shares and go public.
- It reduces the liability of owners legally.
- Owners’ tax liabilities are reduced as they get paid through salaries and packages.
C Corporations have some disadvantages:
- Owners retain limited control over the business.
- It is a costly and complex business ownership structure.
- It comes with more legal and regulatory scrutiny.
- The business and its owners get taxed twice at corporate and individual tax rates, respectively.
An S Corporation is a refined business ownership structure of a C Corporation. It offers an added benefit of a pass-through tax structure on top of a C Corporation.
It means owners can enjoy a corporation’s limited liability but with a reduced tax burden.
Key advantages of an S Corporation include:
- Pass-through taxes for owners.
- Separate legal entity concept like a C Corporation.
- Limited legal liability for owners.
- Attractive capital funding sources through shares issue.
Some limitations of an S Corporation ownership include:
- Only 100 shareholders can become owners of an S Corporation.
- It comes with increased legal and formal documentation requirements.
- It is a complex and costly business ownership structure.
A benefit or B Corporation is a corporation that includes a public benefit as a legal obligation in its article of incorporation.
It means it is a corporation that would continue its commercial activities normally but will also fulfill its promise of the public benefit.
The board of directors of a B Corporation is responsible for measuring and reporting this public benefit on the company’s financial statements.
Regulators and tax authorities would compensate such corporations with lower tax liabilities and other compensations.
Some key advantages of a B Corporation include:
- It comes with limited ownership liabilities for all owners (shareholders).
- The corporation can work as a regular C Corporation and distribute profits to its shareholders.
- B Corporations can also access the capital market for external funding by issuing shares.
Some disadvantages of B Corporations are:
- This ownership structure is not available everywhere.
- It comes with increased legal and regulatory scrutiny.
- It is a complex structure and requires more paperwork.
- It comes with an increased burden on legal and financial reporting.
Not-for-Profit or non-profit corporations are corporations that are tax-exempted by the regulators.
These corporations come with the same ownership structure as a regular C Corporation. It is owned by its shareholders and managed by a board of directors.
A non-profit corporation can generate profits, as the name suggests. However, generating profit does not come as its primary objective.
Some key advantages of a non-profit corporation are:
- This ownership form is tax-exempted.
- Owners enjoy the limited liability protection as with a C Corporation.
- It generates profits and serves public benefits as its primary goal.
Some limitations of a non-profit corporation include:
- Its commercial activities are highly regulated.
- It comes with limited commercial activities as it must focus on the public benefit for which it is incorporated.
- Non-profit corporations have limited access to the capital market.