What is ownership in business? This question will typically be on the mind of anyone looking to start a business or someone wanting to choose the best ownership structure for their business. The truth is, owning and running a company is not an easy feat. There are so many things that business owners need to know about running a successful business. This article aims to simplify what ownership in business means.
Specifically, you will learn the following:
- What it means,
- Its different ownership structures,
- The pros and cons of each structure
- and Things to consider when selecting an ideal structure for your business.
If you want to learn these, ensure you read it to the end.
Meaning of Ownership in Business – What is Ownership in Business
Business ownership is when someone has control of a business enterprise.
It is when someone legally owns a business, giving them autonomy over the company.
This authority allows them to make decisions about the functions and operations of the company.
An individual cannot make business decisions for the company without owning a business.
You can also think of business ownership as a company’s legal structure.
A company’s legal structure goes a long way in determining how that company operates.
It influences the company’s daily operations, risk level, taxation, etc.
The kind of ownership a person has over a business determines its legal structure, which is a framework that defines a company.
Types of Ownership Structures in Business – What is Ownership in Business
There are several types of business structures, and your business structure will determine a lot of things in your company.
Because of how crucial this is, every business owner needs to take time to understand the structure they want for their business.
You would be doing your business a disservice if you decided on a structure without fully understanding it.
Thankfully, this section will explore the different types of ownership structures to help you make an informed decision.
All these different structures come with their pros and cons.
Knowing and understanding the drawbacks and benefits you stand to get from each structure will help you in your decision-making.
Therefore, we’ll also look at the disadvantages and advantages of all the ownership structures we discuss.
With that being said, below are 6 common ownership structures in business.
Sole Proprietorship- What Is Ownership In Business
A sole proprietorship is business ownership in its most basic form.
This is why it’s the most commonly used structure.
It is not as complex as others, and setting it up is quite simple.
A sole proprietorship is when one individual owns and directs a company.
The individual has complete control over the business and runs it however they want.
The business owner does not have to get the permission of anybody to decide on their company.
So, if you run a one-man business registered in the state, you have a sole proprietorship business.
Sole Proprietorship Pros
A sole proprietorship has so many benefits.
For starters, it is very easy to set up this business structure.
All you have to do is register your company with the state, and you can begin operation.
Secondly, you have total control over the company.
This means you do not have to wait for anyone to give the go-ahead to do anything in the company.
You also get to determine the business operation time.
You can be as flexible as you want to be.
Also, you don’t have to share your business profit with anyone.
The reason is that you are the business’s sole owner, and all its earnings belong to you.
Moreover, you own all of the business assets.
Finally, there’s no corporate tax in a sole proprietorship for this type of business ownership.
Sole Proprietorship Cons
Just like this ownership structure has its advantages, it also has certain drawbacks.
A major drawback of a sole proprietorship is that the owner is solely responsible for the business.
This means that you would be solely responsible for raising the business capital.
It also means that you alone are responsible for the company’s losses and debts.
If your business runs into debts or experiences any loss, then you would be personally responsible for it.
Lastly, a lot of sole proprietors tend to mix their income with that of their business since there’s no one to question their actions.
This often leads to financial problems for the companies.
It can cause the companies to experience loss since the business owner can end up spending their income alongside that of the company.
However, this is one disadvantage that you can prevent.
All you have to do is make sure that you separate your income from your company’s income.
You can create different bank accounts for your money and your company.
Partnership
A partnership is when more than one person owns the business.
So, if you and another person own your business, you are in a partnership.
And the people you share the business with are your partners.
There are two main types of partnerships.
There’s the general partnership and limited liability partnership, commonly called an LLP.
In a general partnership, all persons involved share responsibility for debts the company incurs.
That is to say, if the company has a debt or loss, every partner in the partnership is liable for it.
A general partnership is easier to set up than its counterpart.
You do not necessarily need a legal agreement to create the partnership.
The partnership can be formed with a simple written or verbal agreement between the parties.
With a limited liability partnership, every partner is liable for only the loss or debt they incur.
If another partner incurs a debt, the other partners will not be responsible for it.
Only the partner that incurs the debt is liable for it.
However, unlike a general partnership, you need a legal agreement between the partners to create an LLP.
This is the only way to ensure the protection every partner has against the other partner(s) actions.
Partnership Pros
Owning and running your business with other people comes with many benefits.
For example, you do not have to make all the decisions independently; every partner has a say in the company’s running.
How is this an advantage?
Well, the truth is, running a business is not easy.
Being the only one making the decisions can put much pressure on you.
When you have others in the decision-making process, it will significantly reduce the pressure on one person.
It can also make the process easier.
And the chances of making a poor decision will significantly reduce as more people think of the best solution to the issue.
Another benefit of this structure is that you’ll share the responsibility of raising the business capital with the other partners.
This will make it easier and faster to generate capital.
Also, you have a greater capacity and chance of getting loans as a partnership.
Partnership Cons
Working with other people is not easy.
There may be disagreements here, and there that can cause friction between the partners.
When this happens, there’s a chance that the partners will start antagonizing each other, and this will cause issues for the company.
Also, in a general partnership, the other partner(s) can be liable for what another partner does.
So, even if the company becomes indebted or experiences a loss because of your partner’s action, you could be held responsible for it.
Cooperative – What is Ownership in Business
With this ownership structure, the business owners often consume the company’s service.
The main aim of a cooperative is to offer benefits to the owners.
The organization’s goals are usually social, economic, or cultural.
Cooperative Pros
Perhaps, the biggest advantage of a cooperative is that its management is democratic.
Every cooperative member has a say in its running and has voting rights.
Another benefit of this structure is that starting it up is relatively easy.
Also, all members of the cooperative share responsibility for it because the business’s funding is done internally.
Cooperative Cons
One of the benefits of this structure also doubles as a drawback if you look at it from a different perspective.
The voting right of every member is the same.
It does not matter if you invest more money than the other members.
They would still have the same rights as you.
Also, cooperatives rely on the funds they generate internally.
This can be an issue for the business.
Private Limited Company (LTD) – What is Ownership in Business
Private limited companies or LTDs are privately held incorporated businesses.
When you say a company is incorporated, it means that it is legally a separate entity from its owner.
It’s privately held because its shares are private.
An LTD ownership is usually divided based on the company’s shares.
People who own the company’s shares are the company’s shareholders.
The owners of this business have limited liability.
This way, the personal assets of the company shareholders (owners) are protected against any liability the company incurs.
Private Limited Company Pros
One of the best things about private limited companies is that all shareholders have limited liability.
So, if you are a shareholder in an LTD and the business incurs a liability, you are not responsible for it.
Another advantage of this structure is that the shares are private.
This means that members of the public cannot buy the shares.
For someone else to get ownership in the company, one of the current shareholders will have to decide to sell their shares to that person.
This protects the company against loss of control and ownership.
Also, even if an owner of an LTD dies, the business can continue to exist because it is incorporated.
Private Limited Company Cons
If you are not a shareholder but want in on the business, then the fact that the shares aren’t traded publicly can be a drawback for you.
Also, starting up a private limited company is not easy.
It is relatively one of the hardest ownership structures to set up as it requires legal paperwork.
Also, it is quite expensive; this is majorly due to the legal and administrative expenses.
Public Limited Company (PLC)- What Is Ownership In Business
Public limited companies are the opposites of private limited companies.
Where the shares of LTDs are private, those of PLCs are public.
However, just like LTDs, PLCs are incorporated and offer their shareholders limited liability.
The PLC’s management is the board of directors, while the shareholders are the owners of the business.
The company’s shares are traded publicly, usually on the stock market.
Public Limited Company Pros- What Is Ownership In Business
One of the best things about PLCs is their publicly traded shares.
For this reason, it is easier for these companies to generate capital through their shares.
Moreover, PLCs can easily attract investors.
Another advantage is the limited liability PLCs offer their owners.
Since they have this coverage, they won’t be responsible for whatever liability the company incurs.
Public Limited Company Cons
Again, that PLCs shares are public also doubles as a disadvantage.
This is because anyone with the money can easily buy the shares and become a shareholder.
And the more shares an individual owns, the bigger their portion of the company’s ownership.
So, there’s a very high risk of business owners losing control and ownership.
If one person buys enough shares, they can become a major shareholder.
Also, PLCs are more exposed to the public.
This makes them more vulnerable to public regulations and scrutiny.
Nonprofit Organization – What is Ownership in Business
These businesses, unlike other businesses, are not created for profit generation.
This does not mean that these organizations do not generate profit; they do.
However, the profit they generate doesn’t go into the owners’ pockets.
Rather, they use the profit for a particular cause in society.
Nonprofit Organization Pros
People who own nonprofit organizations have personal liability that protects them from any liability the company incurs.
Nonprofits do not have to pay corporate income tax if they adhere to the criteria.
One major advantage of this structure is that people volunteer to work for the organizations.
If the organization has a strong mission, it will attract a lot of talents that believe in the mission.
Nonprofit Organization Cons
One of the major disadvantages of nonprofits is that they have stakeholders that may mount immense pressure on the company’s management.
Also, nonprofits are exposed to the public.
This means that members of the public can scrutinize the organizations, even down to their finances.
Things to Consider When Choosing a Business Structure
After going through the different types of ownership structures in business, you are most likely wondering which one to use for your business.
The truth is just knowing the different options and their advantages and disadvantages is not enough to help you choose the ideal structure.
The structure you decide on has to match your business’s peculiar needs and situation.
This is why you have to consider several factors to help you decide.
The following are the major factors you should consider when selecting an ownership structure for your business.
Setup Finance
Setting up most business structures takes money.
However, your money would depend on the legal and administrative costs.
And some structures require more legal work than others.
So, one of the most important things you should consider when selecting a structure for your business is how much you have to spend on the setup costs.
If you cannot afford a particular structure, you should consider another that is similar but cheaper than what you have in mind.
Liabilities
Another thing that you have to consider is the liability the ownership structure offers.
Suppose you are very particular about protecting your finances and assets from any debt the company may incur.
In that case, you should choose a structure offering this protection.
In this case, you should avoid sole proprietorship as this does not offer any liability.
If your business incurs a liability, you will be responsible for it.
However, incorporated businesses offer limited liability.
So, consider PLC and cooperation if liability protection is important.
Ownership Transfer – What is Ownership in Business
With some business structures, the business might stop operating once the business owner dies.
This is especially true for sole proprietorship businesses.
So, if you wish for your business to outlive you and you’d like to pass it down to someone after your death, you should find the ownership structure that will allow this.
Number of Shareholders/Owners
How many people will own the business?
This is another thing that you should consider when choosing an ownership structure.
Some structures can accommodate a couple of owners, whereas others can take as many as 100.
So, you have to select a structure that can accommodate the number of owners you want for your company.
Conclusion on What is Ownership in Business
Business ownership involves legal control over a company and its processes.
There are different ownership structures that business owners select from for their businesses based on their needs.
Typically, the ownership structure of your business has a lot of influence on the company.
As a business owner, you have to properly consider certain factors before deciding.
Hopefully, every piece of information you’ve discovered here helps you choose the best organizational structure for your business.
