Three Basic Types of Business Ownership Structures – Advantages and Disadvantages

There exist three basic types of business structures. One should know the basic forms before getting into a business situation to avoid potential problems. The three basic types of business structures are as follows:

i) Sole Proprietorship:

This type of business is owned by one person who is called a proprietor. The proprietor manages the business. Some disadvantages are as follows: the proprietor assumes all risks of the business and personal assets can be taken by creditors. One major advantage of the sole proprietorship is the owner makes all the decisions.

ii) Partnership:

a) The general partnership business structure is owned by more than one person.

One or more partners may manage the business. As to disadvantages, like the sole proprietorship, partners assume the risks for the business and their assets may be taken by creditors. Additionally, partners may disagree about the best way to run the business, which could result in a conflict. An advantage of a partnership is the owners share risks and decision making.

b) There is another form of business structure in the partnership arena, which is

called the Limited Liability Partnership (LLP). This form is different from the general partnership structure. Liability is limited to the assets of the partnership in this business form.

iii) Corporation:

a) The general corporation is owned by stockholders (or shareholders).

Usually a corporation may have many owners and they usually employ professional managers. The owner’s risk is usually limited to their personal investments and they often have very little influence on the business decisions. However, the corporation veil may be pierce if the corporation is negligent in its operation.

b) The next corporate form is the Limited Liability Corporation (LLC). This

structure is different for the general corporate form. As the name implies, liability is limited in this form as in relation to the general corporate structure.

c) Finally, there exists the non-profit corporation. These types of corporations

are normally 501(c) such as a church, community based organizations, a public high school, YMCA, and the like. The tax structures are normally different for the profit making organization as in relation to the non-profit making corporations.

Before any business decision is made it’s best to consult a professional in the area such as an attorney who specializes in the field of business formation. There are also some business consulting firms where help may be obtained. The Small Business Association also has a group of individuals available to help known as, Service Corps of Retired Executive (SCORE), or Counselors to America’s Small Business.