example of ownership structure in a business plan

How to write the structure and ownership section of your business plan?

Business planning is vital to the success of any entrepreneur because it helps them secure funding and find competent business partners. The document itself contains a variety of key sections, including the presentation of the legal structure and ownership of the business.

This section details the legal structure of your business and helps interested parties such as lenders and investors understand who they will be doing business with if they decide to go ahead and finance your company.

In this guide, we’ll look at the objective of the structure and ownership section, deepdive into the information you should include, and cover the ideal length. We’ll also assess the tools that can help you write your business plan.

Ready? Let’s get started!

In this guide:

What is the objective of the structure and ownership section of your business plan?

What information should i include when presenting the legal structure and ownership of my company in my business plan.

• How long should the structure and ownership section of your business plan be?
• Example of structure and ownership in a business plan

What tools should I use to write my business plan?

The objective of this section is to provide potential investors, lenders, and strategic partners with a clear and transparent view of your business's legal form, ownership distribution, and registration details. 

It aims to build credibility and trust by showcasing your commitment to openness and compliance with regulations. Let's take a look at some of the key objectives:

Communicate the legal form and registration details

• You should explicitly state your business's legal form. For example, your business might be corporation, sole proprietorship, or limited liability company (LLC). 
• Clearly explaining your chosen legal form helps stakeholders understand your entity's liability, taxation, and management implications.
• It is also essential to disclose where your company is registered. This information is vital as it provides clarity on the jurisdiction under which your business operates. 
• It also helps investors and lenders assess any legal and regulatory implications specific to the location of registration.

Identify shareholders

• Potential investors and lenders need to know who owns the company and the percentage of ownership each party holds. 
• By providing this information, you instill confidence in your business and help identify what needs to be verified as part of Know Your Customer (KYC) and Anti-Money Laundering (ALM) checks down the line.

Transparency is the cornerstone of credibility for businesses. By openly presenting the legal structure and ownership, you signal to potential investors that your business operates with integrity and adherence to regulations. 

Notably, anti-money laundering regulations require investors to verify the identity of all shareholders before committing funds. By providing a clear picture of the parties involved, you can facilitate this process and build trust with investors.

Venture capitalists (VC) firms and angel investors in particular, may have specific criteria such as location and ownership mandates governing the companies they can finance. Being transparent about your company's structure and ownership enables potential investors to assess whether your business aligns with their investment preferences and requirements.

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The structure and ownership subsection arrives quite early in your business plan as it is the first part of the company section which is the second section of the document (after the executive summary) if you are following a standard business plan outline .

At this stage, the reader is still in the process of getting familiar with your business, and this section serves as a crucial foundation for potential investors and partners and helps them understand the core aspects of your business’s structure.

Here's what you should include:

Company registration details and registered office address

Provide information about when and where your company was registered and its registration number. This enables readers to understand the jurisdiction under which your business is operating and helps verify its legal existence.

Also, mention the registration date to showcase the company's longevity or recent establishment.

Include the registered office address of your company. This is the official address where the company can be contacted, and legal notices can be served. Providing this address demonstrates your commitment to compliance and transparency.

The information above needs to repeated for each subsidiary or joint venture owned by your business in order to provide a clear map of the coporate structure.

Overview of ownership

Offer a concise overview of the ownership structure of the company. Identify the shareholders, and specify their ownership percentages or shares. 

If there are numerous shareholders, list individuals or entities owning 5% or more, and highlight those with a controlling interest in the company or on the board.

If the business is controlled by another business, such as a holding company for example, it is also useful to explain who controls that business as well.

Roles and responsibilities of shareholders

In case of multiple shareholders, explain their respective roles and responsibilities within the organization. 

Differentiate between passive investors, board members, and executive or non-executive directors. 

Shareholders' agreement (if applicable)

If the business plan is presented for investment purposes, it is useful to clarify if a shareholders' agreement is in place between the existing investors. 

This agreement outlines the rights and obligations of shareholders and adds an extra layer of legal protection for investors and shareholders.

Expertise of co-shareholders

Highlight any shareholders who contribute more than just financial capital to the company. 

If, for instance, a shareholder is an industry expert and brings valuable advice, contacts, and credibility, emphasize this aspect. 

Doing so demonstrates the added value these shareholders bring to the business.

Group or franchise structure

If your company operates as part of a group or franchise, provide this information for each individual company receiving funds. 

Clarify the relationship between the main company and the individual entities within the group and their respective legal structures.

Addressing geographical restrictions

If some investors have geographical restrictions on their investments, clearly indicate whether your company meets their eligibility criteria. 

This helps investors quickly assess whether your business aligns with their investment mandates or not.

How long should the structure and ownership section of your business plan be? 

The length of your business plan's structure and ownership section requires a delicate balance. 

While a general rule of thumb suggests that it should be about 2 to 3 paragraphs, the actual length depends on several factors, including the complexity of your corporate structure and the number of shareholders involved.

The complexity of your corporate structure 

• A concise presentation may be sufficient if your company's legal structure is relatively straightforward, with a single owner or a small number of co-founders. 
• In such cases, aim to provide the necessary information without overwhelming the reader with unnecessary details. A paragraph or two may convey the key points effectively, ensuring clarity and brevity. 
• However, if you have a complex business structure, aim to provide details about members who play a key role in business continuity and profitability. 

The number of shareholders involved

• If your business involves multiple shareholders, each with significant ownership percentages or unique roles, you may need to dedicate more space to this section. 
• Do this by providing a comprehensive breakdown of ownership distribution and outlining each shareholder's contributions. 
• This may take up more space as you need to add additional information. However, if you have a pretty straightforward ownership structure, a paragraph or two will be sufficient enough.

Regardless of the complexity, striking the right balance between providing sufficient detail and avoiding excessive technical jargon is crucial. The structure and ownership section should be reader-friendly, allowing potential investors and stakeholders to understand the core aspects of your company without feeling overwhelmed by intricate legalities.

Repetition can dilute the impact of your message and unnecessarily lengthen the section. Ensure that you don't reiterate information that has already been covered in other parts of the business plan. Instead, focus on providing unique insights and details that enhance the reader's understanding of your corporate structure and ownership.

When crafting this section, prioritize the most critical points that investors or partners need to know about your company's structure and ownership. 

Focus on aspects that directly impact decision-making, such as the majority shareholder's influence, board composition, different classes of shares in issue, or any unique arrangements that set your business apart.

Example of structure and ownership section in a business plan 

Below is an example of what the structure and ownership section of your business plan might look like. As you can see, it is part of the overall company section and precedes the location and management team subsections.

The structure and ownership section of a business plan provides a detailed overview of how your company is organized and who holds ownership stakes in the business.

This example was taken from one of  our business plan templates .

In this section, we will review three solutions for creating a business plan for your business: using Word and Excel, hiring a consultant to write the business plan, and utilizing an online business plan software.

Create your business plan using Word and Excel

This is the old-fashioned way of creating a business plan (1990s style) and using Word and Excel has both pros and cons.

On the one hand, using either of these two programs is cheap and they are widely available. 

However, creating an error-free financial forecast with Excel is only possible if you have expertise in accounting and financial modeling.

Because of that investors and lenders might not trust the accuracy of your forecast unless you have a degree in finance or accounting.

Also, writing a business plan using Word means starting from scratch and formatting the document yourself once written - a process that can be quite tedious - especially when the numbers change and you need to manually update all the tables and text.

Ultimately, it's up to the business owner to decide which program is right for them and whether they have the expertise or resources needed to make Excel work. 

Hire a consultant to write your business plan

Outsourcing your business plan to a consultant can be a viable option, but it also presents certain drawbacks. 

On the plus side, consultants are experienced in writing business plans and adept at creating financial forecasts without errors. Furthermore, hiring a consultant can save you time and allow you to focus on the day-to-day operations of your business.

However, hiring consultants is expensive: budget at least £1.5k ($2.0k) for a complete business plan, more if you need to make changes after the initial version (which happens frequently after the first meetings with lenders).

For these reasons, outsourcing the plan to a consultant or accountant should be considered carefully, weighing both the advantages and disadvantages of hiring outside help.

Ultimately, it may be the right decision for some businesses, while others may find it beneficial to write their own business plan using an online software.

Use an online business plan software for your business plan

Another alternative is to use online business plan software .

There are several advantages to using specialized software:

• You are guided through the writing process by detailed instructions and examples for each part of the plan
• You can be inspired by already written business plan templates
• You can easily make your financial forecast by letting the software take care of the financial calculations for you without errors
• You get a professional document, formatted and ready to be sent to your bank
• The software will enable you to easily track your actual financial performance against your forecast and update your forecast as time goes by

If you're interested in using this type of solution, you can try our software for free by signing up here .

To sum it up, a well-written structure and ownership subsection is key to ensuring that the reader is clear on who controls the business, and whether or not it fits their investment criterias.

Also on The Business Plan Shop

• How to do a market analysis for a business plan
• How to present your management team in your business plan?
• Where to write the conclusion of your business plan?
• Executive Summary - The most crucial part of your business plan
• How to write the location section of your business plan?
• How to present the management team in your business plan?
• Definition of a business plan
• Business model and business plan: the difference explained

Know someone who needs help writing-up their business plan? Share this article with them and help them out!

Founder & CEO at The Business Plan Shop Ltd

Guillaume Le Brouster is a seasoned entrepreneur and financier.

Guillaume has been an entrepreneur for more than a decade and has first-hand experience of starting, running, and growing a successful business.

Prior to being a business owner, Guillaume worked in investment banking and private equity, where he spent most of his time creating complex financial forecasts, writing business plans, and analysing financial statements to make financing and investment decisions.

Guillaume holds a Master's Degree in Finance from ESCP Business School and a Bachelor of Science in Business & Management from Paris Dauphine University.

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Introduction to Ownership Structure

It is important to understand what a share ownership structure is so that you can understand the diversity of the businesses around you.

A business does not just vary in size and industry but also in its ownership . This means that some businesses are owned by a single person, group of people, corporations, charitable foundations, or trusts. In fact, some businesses are also owned by the state. Basically, different ownership structure types overlap the different legal forms that a business can take.

It is important to understand what a share ownership structure is so that you can understand the diversity of the businesses around you . Being the owner of a business entity, it is important to understand how the ownership structure of a particular business entity is organized and what that means for the owner’s rights. This article will explain just that for you. Keep reading to know more!

What is an ownership structure?

With a few exceptions, businesses have owners. The nature and the number of owners usually vary a lot for each business. In fact, the owner of a business can be an individual or even another business. To make things more complicated, the rights of an owner to the business can be split between the economic and management rights . The management rights here refers to the ability to influence the appointment of the officers while the economic rights include the rights to receive dividends and profits of the business .

A lot of businesses also own other businesses. To be clear, there are basically three levels of ownership in a share ownership structure. These are parents , affiliates , and subsidiaries . Here, parent companies own the subsidiaries. The amount of ownership interest can range from a fraction to even a complete 100%. Additionally, an affiliate is a sibling legal entity.

This approach to ownership structure includes situations such as publicly-traded firms, closely-held companies, outside investors , and joint ventures. An ownership structure concerns the internal organization of a business entity and the rights and duties of the individual holding the equitable or legal interest in that business.

For instance, a shareholder who is also the owner of a corporation has certain rights. These rights are distinct from the ones of the members of a limited liability company . Additionally, within the corporation, a holder of preferred stock might have different rights as compared to the holder of common stock .

The ownership structure of a single company

When we talk about the ownership structure of a single company, it means that the company does not have any subsidiaries or associates in the picture. It is just one company that has a few shareholders in them. And there are different kinds of shareholders that make up the company, but not everyone has the rights and control over the company. Some have complete control, some of a little control while the others have no control at all.

Total Shareholder Composition

As you can see in the diagram, the ownership structure in this company have institutional shareholders with 65.05% of the company ownership , retail shareholders at 13.17% , sovereign wealth funds at 10.47% , foundations (or founder) at 5.20% and others at 6.11% . How you reach the ultimate shareholder structure depends on how the deals fall into place when taking on new investors and if you plan to issue any ownership to employees or other parties.

Ownership Structure of Partnerships and LLCs

LLCs are formed at the state level where there is no involvement of the federal government or the IRS in it. An LLC is formed with the Articles of Organization which is filed with the state. The LLC is not made up of shares and hence has to choose the kind of management structure it would like to use from a member-managed or a manager-managed one. It is the same as a partnership where friends or family can join together to run the business.

All these people are known as the owners in the company and not the shareholder since the LLC is not made of shares . Plus, there are no specific rules on who gets how much (which is usually based on shares for corporations). In LLCs, the agreement between the owners is what helps them understand who gets how much, unlike corporations where payouts from the company are based on share ownership from the shareholders .

What is a shareholder?

A shareholder can be defined as a company or an individual who l egally owns one or more shares in a company . Both private and public companies have shareholders and they make up the company. But it is important to note that the shareholders own the stock in the company and not the corporation itself.

Based on the share class that is given to the shareholders, they get some extra privileges. This includes the right to vote in the election of the board members, the right to the company’s assets during liquidation, the right to buy new shares issued by the company , and the rights to a part in the distribution of the company’s returns .

Shareholders in the primary market who buy IPOs provide capital to corporations. However, the vast majorities of shareholders are in the secondary market and provide no capital directly to the corporation. This means that the shareholders of a public corporation are not – (1) owners of the corporation , (2) the claimants of the profit , or (3) investors, as in the contributors of capital .

Different types of shareholders

From the above, it is clearly understood that there are different types of shareholders that make a company. There are two types: common shareholders and preferred shareholders . Let us talk about each.

#1 Common Shareholders

Common shareholders are the shareholders who own shares from the common stock of the company . Basically, the common stock does not have a fixed value. The owners of the common stock have the last rights to the company assets and profits. Additionally, they may get dividends at the discretion of the company’s board of directors. This means that when the company performs well, the owners get a profit, and when the company suffers losses, the owners do not get anything.

Basically, they have an ownership stake in the company that comes with the following rights:

• The right to vote on most of the company decisions including how to respond to a hostile takeover or the board elections.
• The right to participate in a distribution of assets when the company is liquidated.
• The right to receive any common dividends the board declares.

But that is not all. Common shareholders also have the right to file a class-action lawsuit against the company in case there is an act of wrongdoing that potentially harms the company or negatively affects the value of its common shares. This enables them to exercise considerable control over how the company is managed and how it handles strategies for growth .

Just so you know, there are two kinds of shareholders that can own the common shares. But both do not have the same rights. Each has been explained below:

• Founder : These are the owners of the company and get complete rights over the company. This means that they are offered the common stock with all the rights of it as mentioned above.
• Employees : There are two kinds of employees that a company has, including early employees and later employees . The early employees are offered stock that has a few of the rights or most of the rights as they stood with the company during the early stages. But once a company is up and running, more employees join. Now, the company can offer the best ones with incentives through shares and is done by offering them common shares. There are special plans made for this and most of the rights are nullified, excluding the right to sell the shares. Learn more about employee share compensation here !

#2 Preferred Shareholders

Preferred shareholders are the ones who own the preferred shares in the company. These owners have the first claim to the profits and assets of the company. When the dividends are paid out, they get it first and they also get a fixed dividend. After that, whatever is left over, is given out to the common shareholders. These owners do not have any voting rights in the company, which means that they cannot influence the management in decision-making.

All they have is a guaranteed right to be paid a fixed amount of dividends every year and to get the payment before any of the common shareholders get it . The fixed dividend amount is attached to a specific interest rate. For instance, a $10, 5% preference share would pay an annual dividend of 50 cents.

This kind of share is normally offered to investors in the company . There are two kinds of investors:

• Individual Investors: These are people who invest their own money individually in a company in exchange for shares.
• Institutional Investors [angel & VC]: These are organizations that invest the money of others in a company. They become major players in the long-term investment market, such as pension funds, banks, insurance companies, and investment companies.

Ownership Structure of a Corporate Group

A corporate group, unlike a single company, is a group of companies. It is a collection of subsidiary corporations and parent corporations. Their aim is to work together as a single economic entity through a common source of control . The concept of a group is normally used in tax law , company law and accounting to attribute the rights and duties of one member of the group to another or the whole.

The forming of corporate groups usually involves consolidation via mergers and acquisitions , although the group concept focuses on instances in which the merged and acquired corporate entities remain in existence rather than the instances in which they are dissolved by the parent. The group may be owned by a holding company which may have no actual operations.

So, a corporate group has many sets of shareholders . But not everyone has the rights and control over the complete company group. Some have complete control, some of a little control while the others have no control at all. Unlike a single company, the share ownership structure in a corporate group is very diverse.

There are two kinds of shareholders here; majority shareholder and minority shareholder . Let us understand this better.

Majority Shareholder

Having a large amount of holding of about 50% or more shares in the company puts a shareholder in a stronger position as they can pass special resolutions easily. They are the people who have bought interests in a company which also makes them partial owners of the company. As per company law, there is an important threshold to attain. With a majority of over 50% shareholding, the shareholders are able to pass normal resolutions like:

• appointing and/or removing directors ; and
• authorizing the directors to allot shares (other than if there is oneclass of share, as this is authorized under company law).

Along with this, they also have the right to attend annual and general meetings and vote in matters regarding operations . Majority shareholders also have veto power on all decisions. All the rights are usually listed down in the Shareholders agreement deciding who is allowed what rights.

Minority Shareholder

In case a shareholder has a minority shareholding , which is less than 50% of the shares in the company, then the following typical legal rights will apply based on how much percentage of shares they own:

• 5% or more: a shareholder is able to require circulation of a written resolution and can require a general meeting to be held;
• 10% or more: can demand a poll vote at a general meeting;
• 15% or more: can apply to the court to object to a variation of share class rights;
• more than 25%: a shareholder with this minority shareholding can block special resolutions e.g. adopting new articles of association or changing the company’s name;

As statutory rights will only afford a minority shareholder with limited protection , a minority shareholder should attempt to supplement their statutory rights with contractual protections in a shareholders’ agreement or in the Articles of Association of the company . Whether this is achievable or not will depend solely on the negotiating power of the minority shareholder. This is to ensure they have a degree of control and that they are in a position to protect their shareholding.

Additionally, a minority shareholder has the right to disagree to:

• the corporation selling , hiring or exchanging all or s ignificantly all of its property ;
• the maintenance of the corporation in another jurisdiction;
• the merging of the corporation with a corporation that is not an additional or parent; and
• to modify or take away any constraint on the business the corporation may carry on, or the alteration of the corporate articles to revise the provisions concerning the issuance or shift of shares.

Also if a minority shareholder who has 15% or more shares in the company feels that the business of the corporation has been carried on with a purpose to deceive any person, or the powers of the directors have been used in a way that is unfairly injurious, oppressive, or that unlawfully disregards the minority shareholder’s interest, the person can apply to the court for a solution.

Subsidiary Companies

A subsidiary is a company that has been acquired or set up by another company which is usually acquired by a public or larger company as a result of its reputation or longevity. The company that opens or acquires the subsidiary company is called a parent company . If a parent corporation exists strictly to hold stocks in other entities, it is called a holding company .

In such a situation, the parent corporation owns more than 50 % of the voting stock of each company acquired. If it holds all (100%) of the voting stock , the small entity is said to be a wholly-owned subsidiary . Parents and their subsidiaries are separate legal entities when it comes to liability issues. But there are situations where both the parent and the subsidiary company file their financial statements as a single unit. Also, ownership of 80 percent or more of a subsidiary’s stock is required for the parent corporation to submit consolidated tax returns.

Associate Companies

In a broader sense, an associate company is a corporation in which a parent company possesses an ownership stake . Normally, the parent company owns only a minority stake of the associate company, as opposed to a subsidiary company. But the actual definition varies a lot based on the jurisdiction and the type of fields. The reason behind this is that the concept of an associate company is used in securities , taxation , accounting , economics , and beyond .

Basically, an associate company can be partly owned by another company or even a group of companies. And as per most accounting rules, the parent company (or companies) don’t consolidate the associate company’s financial statements. Normally, the parent company records the associate company’s value as an asset on its balance sheet.

Consolidated financial statements are the combined financial statements of a parent company and its affiliated companies or subsidiaries. But keep in mind that there are tax rules that must be followed by both companies and vary for each state and country.

How to record your company’s ownership structure or cap table?

Recording your company’s ownership structure means recording the shares and who owns how much of it in one place. There are two ways to do it. Each has been explained below:

#1 Using excel

The oldest way used by many founders to keep track of all the shares in a company was through Excel Spreadsheets . Let us assume there is a company named Best Service Inc. Here is an example of how the cap table was created on the Spreadsheet .

However, this may not be the complete cap table. The reason is that we cannot see the details about the options , warrants , and convertible notes . If the company has any vesting shares or options as well, it may drastically dilute the ownership in your company.

In addition to this, as the company grows, it would become difficult to add all the details . You may be able to add it all up on excel, but the process may be frustrating and time-consuming. You might not be able to show the cap table easily to the other shareholders or investors as you constantly update it. That is why cap table software was created to eliminate any errors and keep your shareholdings up to date.

#2 Using software

As mentioned above, Excel is a powerful and affordable tool. But there are a lot of downsides to using it for a cap table. Fortunately, there is an equity management software that you can take advantage of. The software would reduce the risk of recording an improper transaction and the headache from consistent spreadsheet maintenance.

In addition to this, several cap table management software products offer services that handle all the complicated calculations for you, including the calculation of the fair value of the share-based compensation based on many assumptions like equity value , discount rates , volatility , etc.

Here are the benefits and features of most of the cap table software online:

• Cap table management – this is the main feature where you can easily manage all the shares in your company and handle the share ownership structure from here.
• Manage the records & filing – You can easily stay up to date with your records and filings.
• Issuing Electronic Stocks in Seconds – Issue new shares electronically , transfer existing shares , and do many other things through the application all online. And with everything online, you can easily make smarter decisions and see your company standing at any time.
• Manage Your Shareholders – You will be able to see all the transactions made by the shareholders online (after they are added to the application to view the cap table).
• Less Time Spent on Data Entry – Spend less time in adding the data in the application where you can easily enter many transactions at once. Defensible 409A Valuations – Get a defensible 409A valuation prepared by the experts that would help you have safe harbor status from the IRS .
• Sharing Information With Others – You can easily share partial or complete information about the cap table with the shareholders or other people through the software. You can monitor who sees what and even download the reports to keep them offline .

All in all, the cap table software is the best way to keep track of your share ownership structure and your control in the company as well.

How can Eqvista help track your company’s ownership structure?

Now that you know what share ownership structure is , it is important to learn how to manage it well . Eqvista is an application that can help you do that. It will help you have an organized share structure, which is very important for showing the shareholders of their ownership in the company. You will be able to see the total shares outstanding , the shares issued , purchased , and authorized to owners and investors . In short, the cap table will act as the master ledger to show all the current shareholdings.

Here is the same example of the ownership structure of Best Service Inc on the Eqvista cap table software.

Having an up-to-date cap table helps you in managing all the shareholdings in the company. You will also be able to be compliant with the rules and regulations while dealing with compensation and taxes. Along with this, the investors that review your cap table will recognize the value of your company , and the deal will be made more easily .

With Eqvista , you can easily handle all the shares of your company . In fact, it has all the features mentioned above that a cap table software should have. In addition to that, here are some other benefits that Eqvista offers:

• Eqvista would assist you in filing your company with the Division of Corporations of your state.
• Ownership structure and shareholdings are transparent on Eqvista.
• The management of the cap table would display a clear provenance record
• The software would accurately calculate the corporate items like dividends and stock splits .
• A direct communication link would be set between investors and issuers .

So, using Eqvista , you will not just be able to manage your shares , but also keep an eye on your company’s share ownership structure. Try out our app today !

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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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Business Plan Tutorial: Types of Business Ownership

This article provides an overview of the most common types of business ownership. There are basically three types or forms of business ownership structures for new small businesses:

1. Sole Proprietorship

A business owned and operated by a single individual — and the most common form of business structure in the United States.

The advantages with a sole proprietorship include ease and cost of formation — simply announcing you are in business and requesting any licenses and permits you may need; use of profits — since all profits from the business belong exclusively to you, the owner; flexibility and control — you make all the decisions and direct the entire business operations; very little government regulations; secrecy; and ease of ending the business.

There are disadvantages, however, including unlimited liability — all business debts are personal debts, meaning you could lose everything you own if the business fails or loses a major lawsuit; limited sources of financing — based on your creditworthiness; limited skills — the sole proprietor really must be a “jack-of-all-trades,” part manager, marketer, accountant, etc.; and limited lifespan — the business ends when the owner dies.

2. Partnership

A business that is owned and operated by two or more people — and the least used form of business organization in the United States.

There are two basics forms of partnerships, general and limited. In a general partnership, all partners have unlimited liability, while in a limited partnership, at least one partner has liability limited only to his or her investment while at least one other partner has full liability.

Most states require a legal document called the “Articles of Partnership” that delineates details about each partner’s investment and role in the new company.

The advantages of a partnership include ease of organization — simply creating the articles of partnership; combined knowledge and skills — using the strengths of each partner for better business decision-making; greater availability of financing; and very little government regulations.

There are disadvantages, however, including unlimited liability — all business debts are personal debts; reconciling partner disagreements and action — each partner is responsible for the actions of all the others; sharing of profits — all money earned has to be shared and distributed to the partners per the articles of partnership; and limited lifespan — the partnership ends when a partner dies or withdraws.

3. Private Corporation

A business that is a legal entity created by the state whose assets and liabilities are separate from its owners.

While there are also public corporations — who stock (and ownership) are traded on a public stock exchange — most small businesses are (or at least start as) private corporations.

A private corporation is owned by a small group of people who are typically involved in managing the business. Forming a corporation requires developing a legal document called the “Articles of Incorporation” and submitting them to the state in which the corporation wishes to reside.

The advantages of a corporation include limited liability — an owner (stockholder) can only lose up to the amount s/he invested; unlimited lifespan — a corporation is charted to last forever unless its articles of incorporation state otherwise; great sources of funding; and ease of transfer of ownership.

Disadvantages include double taxation — the corporation, as a legal entity, must pay taxes, and then shareholders also pay taxes on any dividends received.

Two other types of ownership include:

S Corporation

A form of ownership that is the best of both partnerships and corporations.

Owners have limited liability, greater credibility (for obtaining financing), and no double taxation as all profits pass directly to the owners and the corporation pays no taxes. There are, however, restrictions on the number and type of shareholders.

Limited Liability Company (LLC)

A form of ownership that is growing in popularity in the United States.

LLCs provides limited liability and are taxed as a partnership or sole proprietorship (depending on the number of members). This type of business formation — formed by submitting articles of organization to the state in which the company resides — is growing rapidly because it is flexible, simple to run, and does not require all the paperwork of corporations.

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Types of Business Structures Explained

13 min. read

Updated January 5, 2024

The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your savings), and even your ability to raise money from angel investors or venture capitalists.

So, the structure you choose is significant.

This guide will explain the basics of common business structures, but we can’t tell you exactly which structure you should choose—if you need that kind of advice, you should consult a lawyer or an accountant.

• Sole proprietorship

The simplest business structure is the sole proprietorship. If you don’t create a separate legal entity, your business is a sole proprietorship. 

The main advantage of the sole proprietorship is that it’s relatively simple and inexpensive. The disadvantage is that it doesn’t create a legal separation between you and your personal assets and business assets. If you’re sued or your business folds—your personal assets are fair game for creditors and in terms of legal liability.

Who is a sole proprietorship for?

A sole proprietorship is ideal for self-employed individuals like personal trainers offering individual coaching or artists selling unique items on platforms like Etsy.

Key considerations

• Cost-effective setup: The primary expense is usually the DBA (“doing business as”) registration. Some states may require public notice, like a newspaper ad. Generally, the total cost is below $100.
• Simplified taxation: Sole proprietorships are “pass-through” tax entities. Profits and losses are reported directly on the owner’s taxes, necessitating only a few additional tax forms if you’re the sole worker.
• Hiring employees is possible: Being a “sole” proprietor doesn’t restrict hiring. If you employ others, tax processes become slightly more intricate.
• Limited ways to raise funding: You can’t sell company stock, limiting fundraising avenues.
• Potential loan difficulties: Banks might hesitate to grant loans to sole proprietorships due to perceived credibility issues.
• Full personal liability: If the business faces debt or legal issues, your personal assets, including your home, car, and savings, are vulnerable.

Dig deeper:

Should you register as a sole proprietorship?

Explore the pros and cons of incorporating as a sole proprietorship.

How sole proprietorships are taxed

Understand how registering as a sole proprietor impacts your taxes.

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• Partnerships

Still a relatively simple business structure, a partnership involves two or more individuals sharing ownership of their new business. They’ll contribute to the business in some way and share in profits and losses.

Partnerships are harder to describe because they change so much. State laws govern them, but the Uniform Partnership Act has become the law in most states. That act, however, mainly sets the specific partnership agreement as the real legal core of the partnership so that the legal details can vary widely.

Usually, the income or loss from partnerships passes through to the partners without any partnership tax. The agreements can define different levels of risk, which is why you’ll read about some partnerships with general and limited partners, with different levels of risk for each. Your partnership agreement should clearly define what happens if a partner withdraws, buy and sell arrangements for partners and liquidation arrangements if necessary.

What are the types of partnerships?

• General partnership: Assumes equal involvement of all parties in profits, liabilities, and duties. Any intentional imbalance should be specified in the partnership agreement.
• Limited partnership: Suited for partners in an investor role with limited involvement in daily operations. This structure is more complex and less common.
• Joint venture: Designed for a single project or a limited duration, operating similarly to a general partnership.

Who is a partnership for?

A partnership is similar to an extended sole proprietorship and is ideal for two or more individuals wanting to start a business jointly. 

To make the partnership more effective, you and your partners should have skillsets, connections, or other unique benefits that complement each other. 

For example, a personal trainer and nutritionist building an online fitness program. One entrepreneur has experience building an exercise regiment with clients. The other understands how to create balanced meal and supplement recommendations. 

They have unique but complementary knowledge that, when combined, creates a more valuable product/service.

• Partnership agreement: While not mandatory, it’s advisable to draft a partnership agreement, ideally reviewed by legal counsel, to clarify roles and responsibilities, ownership, and what will happen if a partner wants to leave the partnership.
• Tax implications: Partnerships are “pass-through” entities, meaning profits and losses are directly passed to the partners. Refer to the IRS for partnership tax details.
• Additional costs: Since it’s a good idea to have a lawyer look over your partnership agreement, don’t forget to factor in this added expense.
• Trust in partnership: Ensure your partner is trustworthy, as partners share responsibility for business decisions and debts. A well-drafted partnership agreement can prevent future conflicts.

How to create a business partnership agreement

Even if you’re not in an official partnership, you should consider drafting a partnership agreement. Doing so will clearly define rights and responsibilities and help you amicably resolve any disputes.

How partnerships are taxed

Understand how registering as a partnership impacts your taxes.

Plan for changes with a buy-sell agreement

What will you do if you or your partner quits, sells their portion of the business, or passes away?

How to find the right business partner

A partnership is more than a legal structure. It’s a relationship between entrepreneurs who share a passion for an idea and bring unique skill sets. So, how do you find the right person to make your partnership thrive?…

Traits to look for in a business partner

What makes a good business partner? If you’re considering someone with the following traits, you likely have a good fit.

How many partners should you have?

What’s the ideal number of business partners? The right mix of people and skillsets can lead to tremendous business growth. But too many may lead to disaster.

What to do when your business partner is your life partner

Should your significant other be your business partner? Learn your legal options and how to find the right ownership fit for your business and relationship.

• Limited liability company

Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating?

It’s understandable—plenty of would-be entrepreneurs shudder at the thought of the bank seizing their personal assets should the business go south.

A limited liability corporation (or LLC) is, in some ways, the best of both worlds. It allows for the flexibility of a partnership or sole proprietorship but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation. It offers a combination of some limitations on legal liability and some favorable tax treatment for profits and transfer of assets.

Who is a limited liability corporation for?

An LLC is ideal for those wary of personal liability in business. If you possess significant personal assets or operate in a lawsuit-prone industry—an LLC safeguards your personal finances. 

• Complexity: While offering more protection, an LLC is harder to establish than a sole proprietorship or partnership.
• Tax benefits: LLCs maintain “pass-through” tax status, meaning you’re taxed only on your profit share, which is reported on personal taxes. 
• Single-member LLCs: Most states allow single-person LLCs, making it a potential alternative to sole proprietorships.

How to form a limited liability company

Interested in forming an LLC? Here are the steps you’ll need to take.

How to create an LLC operating agreement

Set the rules for how your LLC will operate, including the management structure, individual responsibilities, ownership percentage, and other important information.

LLC costs and fees explained

Make sure you’re aware of all the costs and fees associated with forming an LLC.

How LLCs are taxed

Understand how registering as an LLC impacts your taxes.

• Corporations

Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States.

Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made. You’ll almost always want to have your CPA, and in some cases, your attorney, guide you through the legal requirements for switching.

Who is a corporation for?

Corporations are best suited for larger, established businesses with multiple employees, plans for rapid scaling, or intentions to trade or attract significant external investments publicly. A corporation might not be the right choice if you’re a small business owner or work with a small team.

What are the types of corporations?

C corporation.

What we typically think of when we refer to corporations, where all shareholders combine funds and are then given stock in the newly formed business. 

A C corp is a separate tax entity, meaning your business can deduct taxes. It also means that earnings can be taxed twice, as they are concerning your business and your personal taxes if you take income as dividends. However, good tax planning can often minimize the impact of double taxation.

Most lawyers would agree (but verify this with your lawyer who is familiar with your unique business) that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

S corporation

An S corp is similar to a traditional C corporation, with one major difference: Profits and losses can be “passed through” to your personal tax return without being taxed separately first.

In practical terms, the owners can take their profits home without first paying the corporation’s separate tax on profits. In most states, an S corporation is owned by a limited number of private owners (25 is a common maximum), and only individuals (not corporations) can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state and then request S corp status. The IRS instructions for Form 2553 (which you’ll need to file to become an S corp) can help you determine if you qualify.

B corporation

Does your company have a dedicated social mission, a good cause built into its foundation that you’d like to continue furthering as your company grows? If so, you might consider becoming a B corporation, which stands for “benefit corporation.” 

However, the name is a bit misleading; a B corp isn’t an entirely different structure than a regular C corporation. It’s a C corp vetted and approved for B corp status. Some states give tax breaks to B corps, and it’s a great way to stand behind a cause.

So, why would you choose a B corp over a nonprofit? The biggest difference is in ownership—with a nonprofit, no owners or shareholders exist. A B corp, which is still a type of corporation, still has shareholders who own the company. So, a B corp has a social mission but is still a for-profit company (as opposed to a nonprofit) with an end goal of returning profits to the shareholders.

• Liability: Corporations offer the most protection for personal assets.
• Capital raising: The ability to sell stock enhances investment potential.
• Taxation: Corporate taxes are separate (except for S corps), but the structure can lead to double taxation, especially for C corporations.
• Complexity: Establishing a corporation is more intricate than other business structures, requiring more paperwork and formalities.

How to form a corporation

Follow these ten steps to incorporate as a C, S, or B corporation.

How are corporations taxed?

Understand how registering as a corporation impacts your taxes.

S corporation basics

Should you choose an S corp as the legal structure for your business? Learn the basics and what alternatives are available.

B corporation basics

Should you choose a B corp as the legal structure for your business? Check out this detailed overview of how this business entity functions and the pros and cons you’ll contend with.

A nonprofit is a “not-for-profit” business structure, meaning the business does not exist to generate revenue for shareholders, but rather funnel business revenue into a social mission, cause, or purpose.

Who is a nonprofit for?

Nonprofits cater to those with missions centered on charitable, educational, scientific, or religious purposes. Examples include homeless shelters, conservation groups, arts centers, and educational institutions.

What’s the difference between a nonprofit and a cooperative?

Like a nonprofit, a cooperative is a business with a social mission that doesn’t divide income between shareholders but toward a cause or purpose. However, while some states view nonprofits and cooperatives as the same, a cooperative differs because the members own it, referred to as “user-owners.”

If you plan on organizing your business to be democratically owned, looking into the cooperative business structure might be a good idea to look into the cooperative business structure .

• Complex setup: Establishing a nonprofit requires steps similar to forming a corporation, including filing articles of incorporation, creating bylaws, and organizing board meetings.
• Fundraising will be your main priority: Nonprofits generally rely on fundraising and grants to keep a flow of income into their business.

What is a nonprofit corporation and how to start one

Learn the basics of setting up a nonprofit corporation.

How to earn income as a nonprofit corporation

Learn how related and unrelated business activities can generate revenue for a nonprofit corporation.

• Making your business legally compliant

Choosing a business structure is the first legal step you’ll take. Your choice will impact your taxes, fundraising, and personal liability. 

Tim Berry, founder of Palo Alto Software (maker of Bplans) reminds small business and startup founders that choosing a business entity or structure is something to take seriously. He says:

“Make sure you know which legal steps you must take to be in business. I’m not an attorney, and I don’t give legal advice. I strongly recommend working with an attorney to review the details of your company’s legal establishment and licensing. The trade-offs involved in incorporation versus partnership versus other structures are significant. Small problems developed at the early stages of a new business can become horrendous problems later on. In this regard, the cost of simple legal advice is almost always worth it. Don’t skimp on legal costs.”

TLDR: Take time, carefully weigh your options, and consult a legal professional.

Once you’ve chosen, check off the remaining legal requirements to start a business. While you can complete most of these in any order, here are a few suggestions.

• Apply for a federal and state tax ID
• Obtain licenses and permits
• Register your business name

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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This section of your Business Plan should include the following: your company’s organizational structure, details about the ownership of your company, profiles of your management team, and the qualifications of your board of directors.

Individuals reading your business plan will want to see answers to important questions including who does what in your business, what their backgrounds are, why you are bringing them into the business as board members or employees, and what they are responsible for. A detailed description of each division or department and its function should be outlined.

This section should include who’s on the board (if you have an advisory board) and how you intend to keep them there. What kind of salary and benefits package do you have for your people? What incentives are you offering? How about promotions? Reassure your reader that the people you have on staff are more than just names on a letterhead.  

WHAT TO INCLUDE IN THE ORGANIZATION & MANAGEMENT SECTION…

Organizational structure.

A simple but effective way to lay out the structure of your company is to create an organizational chart with a narrative description. This will prove that you’re leaving nothing to chance, you’ve thought out exactly who is doing what, and there is someone in charge of every function of your company. To a potential investor or employee, that information is very important.  

OWNERSHIP INFORMATION

This section should also include the legal structure of your business along with the subsequent ownership information it relates to. Have you incorporated your business? If so, is it a C or S corporation? Or perhaps you have formed a partnership with someone. If so, is it a general or limited partnership? Or maybe you are a sole proprietor.

The following important ownership information should be incorporated into your business plan:

• Names of owners
• Percentage ownership
• Extent of involvement with the company
• Forms of ownership (i.e., common stock, preferred stock, general partner, limited partner)
• Outstanding equity equivalents (i.e., options, warrants, convertible debt)
• Common stock (i.e., authorized or issued)
• Management Profiles
• Experts agree that one of the strongest factors for success in any growth company is the ability and track record of its owner/management team, so let your reader know about the key people in your company and their backgrounds. Provide resumes that include the following information:
• Position (include brief position description along with primary duties)
• Primary responsibilities and authority
• Unique experience and skills
• Prior employment
• Special skills
• Past track record
• Industry recognition
• Community involvement
• Number of years with company
• Compensation basis and levels (make sure these are reasonable – not too high or too low)
• Be sure you quantify achievements (e.g. “Managed a sales force of ten people,” “Managed a department of fifteen people,” “Increased revenue by 15 percent in the first six months,” “Expanded the retail outlets at the rate of two each year,” “Improved the customer service as rated by our customers from a 60 percent to a 90 percent rating”)

Also highlight how the people surrounding you complement your own skills. If you’re just starting out, show how each person’s unique experience will contribute to the success of your venture.

BOARD OF DIRECTORS’ QUALIFICATIONS

The major benefit of an unpaid advisory board is that it can provide expertise that your company cannot otherwise afford. A list of well-known, successful business owners/managers can go a long way toward enhancing your company’s credibility and perception of management expertise.

If you have a board of directors, be sure to gather the following information when developing the outline for your business plan:

• Positions on the board
• Extent of involvement with company
• Historical and future contribution to the company’s success

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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
• Business Disputes & Related Lawsuits
• Social Media Influencer Marketing & Related Legal Issues
• Making a Business Contract
• Commercial Real Estate & the Law
• Small Business Law FAQs
• Find a Business Law Lawyer

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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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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).

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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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Small Business Administration. " Write Your Business Plan ."

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Small Business Administration. " Choose a Business Structure ."

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Business Structure: How to Choose the Right One

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Designing a killer website, prototyping your product, talking your way to your first big order — these parts of starting your business likely stir your entrepreneurial passions.

The business structure of your new enterprise? Not so exciting.

But hold on. Careful consideration of which structure is right for you is crucial because it will have implications for how the IRS taxes your business profits. It’ll also determine whether your personal property is protected when others demand money from your business. Other considerations, including the management of the new business and your long-term plans for it, come into play as well.

Below, we’ve outlined types of business structures and what to consider before choosing one.

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Business structure options

Business structures are largely creations of state law, so there are minor variations on the details from state to state. Here are five common models:

Sole proprietorship

An unincorporated business that is owned by one person who reports business profits on his or her individual tax return. A sole proprietorship is the simplest business structure and is straightforward to start.

Partnership

An unincorporated business owned by multiple owners, either people or other businesses. Profits are divided among its owners and reported on their tax returns. Common partnership types include general partnerships , limited partnerships, limited liability partnerships (LLPs) and limited liability limited partnerships (LLLPs).

Limited liability company (LLC)

An LLC is a hybrid business structure that limits the personal liability of its owners — called members — like a corporation but allows the profits to be taxed on either a member level or the corporate level.

S corporation

An S corporation has one class of stock and no more than 100 shareholders, none of whom can be another for-profit business or a person without a green card who doesn’t meet IRS residency requirements . Profits are taxed on shareholders’ tax returns, and shareholders have limited liability.

C corporation

A corporation whose profit is taxed once on the business level and a second time on an individual basis when earnings are distributed to shareholders, who have limited liability for the business’s debts. C corporations can have multiple classes of stock and an unlimited number of shareholders.

Switching business structures is possible, but it's best to decide early on which one you'll need for the next few years. It can get complicated — not to mention pricey, in terms of legal fees — to change structures, and the effort could distract from running your business.

Choosing your business structure: What to consider

What’s your tolerance for risk to personal assets.

When you run a business, you’re at greater risk for a lawsuit. Why? Businesses interact with the world — other businesses, government, regular people — much more than most individuals, and when they do, there’s a good chance money’s involved.

In a sole proprietorship, if your business is sued and loses, your personal assets — real estate, cars, bank accounts — can be targets for the parties seeking to collect damages. The same can be said, in some cases, if you default on a business loan and you signed a personal guarantee, or the lender placed a lien on your assets. The lender can attempt to recover its investment from your personal property.

In a general partnership, creditors can go after any of the partners’ personal assets to recoup the whole debt. It’s different in a limited partnership, where only the general partners are personally liable for the debts of the business, while limited partners are liable for the business’s debts only up to the amount of their investment. More common among lawyers are limited liability partnerships, which limit partners’ liability for the firm’s debts but still hold them individually liable for their professional activities. There are also limited liability limited partnerships, a sort of limited partnership that extends limited liability to general partners, not just limited partners.

LLCs and corporations limit their members’ or shareholders’ liability, so personal assets are protected.

» MORE: LLC vs. corporation

How do you want the IRS to tax your business profits?

Sole proprietorships, partnerships and S corporations are pass-through entities , as are some LLCs. In a pass-through entity, profits are passed directly to the owners of the business. Come tax time, it is reported on the owners’ individual returns.

By default, the IRS views LLCs as pass-through entities unless they opt to be taxed as a corporation.

C corporations are separate entities from their owners, so their profits are taxed at the corporate level. If a corporation pays out dividends, which come out of its after-tax income, shareholders also must pay taxes on their proceeds.

How formal do you want your management structure to be?

If multiple owners are involved, structuring the business can be more complicated.

Partnerships are typically governed by agreements that specify how profits from the business are divided among parties and what happens when a partner retires, becomes disabled, declares bankruptcy or dies.

An S corporation or C corporation is required by law to have a board of directors to oversee the company’s direction on behalf of the shareholders.

An LLC structure generally allows the choice between being managed by members or overseen by a management team, which can include members or nonmembers. LLCs typically draw up an operating agreement that specifies roles.

How much administrative complexity can you handle?

For noncorporation business structures, initial paperwork and fees are relatively light, and are simple enough for owners to handle without special expertise (though it’s a good idea to consult a lawyer or an accountant for help). Ongoing requirements usually come on an annual basis.

For S and C corporations, the administrative complexity increases, and you will almost certainly need a lawyer and accountant. In every state, there are tax and legal hoops to jump through for corporations to become and remain compliant. Failure to meet deadlines, pay certain fees and file the proper forms can result in penalties.

What are your long-term goals for the business?

The right structure doesn’t just depend on the state of your business today; it also depends on where you would like to be in three to five years, or even longer.

If you’re looking for fast growth, which takes cash, C corporations allow for multiple classes of stock and don’t restrict the number or type of shareholders. They’re the best fit if you’re seeking investments from venture capitalists, or if you plan on becoming a publicly traded company, rather than a privately owned one, in the near- or mid-term.

Another consideration is what happens when you or another owner dies, goes bankrupt or withdraws. Corporations live on after these events, but generally the other types of business structure dissolve unless specified otherwise beforehand.

On a similar note...

What is a Form of Ownership Business Plan?

A single person owns and runs a sole proprietorship, and this sole proprietor has the rights to profits and assets of the business. 3 min read updated on February 01, 2023

Many small businesses begin as sole proprietorships. A single person owns and runs a sole proprietorship, and this sole proprietor has the rights to profits and assets of the business. Debts and liabilities are also the responsibility of the owner. Sole proprietorships are a great way to begin a business since they require very little money.

When you own a business , you are only taxed once. A sole proprietorship is not taxed as much as other business types. One person is the owner, so disagreements with other owners don't happen. It's also easy to end this type of business.

Sole Proprietorship Advantages

There are many advantages to having a sole proprietorship. For example:

• This type of business costs the least and is simple to begin.
• The sole proprietor has total control over the business and can make decisions that are best for the enterprise.
• The sole proprietor owns all the income from the business and can reinvest or retain it.
• The money that the business makes goes directly to the owner's personal tax return.
• It's easy to end the business.

Sole Proprietorship Disadvantages

Disadvantages to having a sole proprietorship include:

• Any debts that form are the responsibility of the sole proprietor. All personal and business assets are at risk.
• They can only use money from consumer loans or personal funds to advance the business.
• It might be difficult to attract high-quality employees.
• Not all employee benefits are available in a sole proprietorship.

Sole Proprietorship tax forms are:

• Schedule SE: Self-employment tax
• Form 1040: Individual Income Tax Return
• Employment Tax Forms
• Schedule C: Profit or Loss from Business (also called Schedule C-EZ)
• Form 8829: Expenses for Business Use of Your Home
• Form 1040-ES: Estimated Tax for Individuals
• Form 4562: Depreciation and Amortization

To run a business of this type takes a special kind of person who can handle all the ins and outs of owning a business . The sole proprietor is completely responsible for all business decisions and raising money. Certain employee benefits cannot be completely deducted from the business's income. Sole proprietors need to be aware that some of the costs can be partially deducted later on taxes as an adjustment.

Partnerships

Another form of business ownership is a partnership. Two or more people can share the ownership of a business in a partnership. The law does not set apart partners and owners, just like proprietorships. With a partnership, there should be some kind of agreement so that both parties know what they are responsible for, as well as what each gets if the business were to end. The legal agreement should include who will make decisions, how profits will be distributed, how disagreements will be handled, how partners in the future will enter the business, and what the process is for partners being bought out.

Partners need to figure out how much each will spend on the business and the amount of time they will spend on the business. Partnerships can be formed with other individuals and businesses. It does not cost much to form a partnership, although tax and liability rules are different for partnerships. Think very carefully who to partner up with, since the entire company can be jeopardized if one partner makes a legal or financial mistake.

Partnership Advantages

Partnership advantages include:

• Partnerships are simple to start but take time to properly grow.
• The likelihood of successfully raising funds increases with partners.
• The money made from the business goes directly to the personal tax returns of all partners.
• Potential employees might be more interested in the business if they know they can become a partner in the future.
• Partners who have compatible skills can help a business grow.

Partnership Disadvantages

Partnership disadvantages include:

• Partners are responsible for each other.
• Partners must equally share all profits.
• Disagreements are likely because decisions are made together.
• Employee benefits are not all deductible on business-related tax returns
• The partnership is not guaranteed to last due to one of the partners leaving or dying.

There are several kinds of partnerships that can be chosen. One is a general partnership where everything is divided, which includes responsibility of management and reliability and loss or profit shared, unless otherwise noted in the initial agreement.

If you need help with a form of ownership business plan, 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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Content Approved by UpCounsel

• What Is the Most Common Type of Partnership?
• Difference Between Sole Proprietorship and Partnership
• Advantages and Disadvantages of Sole Proprietorship
• What is a Sole Proprietorship
• Sole Proprietorship vs Partnership
• Partnership Advantages and Disadvantages
• Define the Term Business Ownership: What You Need to Know
• Can Sole Proprietorship Have 2 Owners: What You Need to Know
• Proprietor Check
• Different Types of Companies and Their Advantages

• Financing & Incentives
• Location & Zoning
• Find a license or permit

Deciding Your Ownership Structure

If you or one of your employees causes injury or damage to a person or property during a business activity, are you personally liable? And will you lose your house or savings? Are you paying income taxes that you could perhaps avoid? The answers to these and other critical questions depend on how you’ve set up your company’s ownership structure.

That’s why it is important to decide early on how your business’s ownership structure will be set up.

There are many types of business ownership. Here are the most common:

• Sole proprietorship
• Partnership
• Corporation
• Limited Liability Company (LLC)

The choice is yours, but it cannot be overstated that it should be made early and with careful deliberation. Your decision will have an impact across your business, including taxes, liability, ownership succession, and many other factors.

There are pros and cons to each type of ownership. Here are just a few examples.

Sole proprietorship. This is the simplest form of ownership to set up. However, you will still have to follow local business registration, license, and permit regulations.

Advantages. Easy start up. Subject to fewer federal regulations. No corporate taxes. Full decision-making power. Ownership of all business income and assets. Easy to dissolve.

Disadvantages. More difficult to raise capital. Unlimited personal responsibility for paying income taxes and business-related debts.

Partnership. Going it alone is nice, but sometimes you need a partner or two, someone to share the investment costs or workload, or to provide expertise in areas where you may be lacking. Just be sure the partnership agreement is spelled out in writing, reviewed by an attorney, and formally registered or notarized.

Advantages. Easy set up. Proportionally shared taxation, liabilities, responsibilities and workload. Avoids the hassles of corporation/LLC filings.

Disadvantages. Shared profits. Possible disagreements between partners. Owners/partners liable to lawsuits and debts. Taxation issues similar to sole proprietorships.

Corporation. Forming a corporation allows you to set up your business as a legal entity that is separate from you as a person.

Advantages. Generally, little or no liability for damages or debts regarding the corporation. Reduction or elimination of certain income taxes.

Disadvantages. Operating control relinquished to board of directors or shareholders. More frequent and complicated tax filings.

Limited Liability Company (LLC). This ownership strategy blends various characteristics of a corporation, a partnership and a sole proprietorship – advantages as well as disadvantages. It is typically more flexible than a corporation and it is well-suited for companies with a single owner.

Advantages. Flexible taxation regulations. Limited liability for some or all acts and debts of the company.

Disadvantages. May be more difficult to raise financial capital. Some states (including Pennsylvania) levy franchise or capital values taxes on LLCs. Renewal fees may be high.

While self-directed research can be productive, we recommend consulting a professional when determining your ownership structure.

Accountants, tax preparers, lawyers and financial advisors can be helpful in this area; just remember that there may be consulting fees involved. And don’t overlook the fact that some choices involve additional paperwork and tax filings that may increase your overall business costs without adding cost-effective advantages.

A helpful booklet,  An Entrepreneurs Guide to Starting a Business in Pennsylvania is available from the State of Pennsylvania, and includes a chapter about ownership structures.

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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.

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How to Choose the Best Legal Structure for Your Business

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Your business’s legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board. [Related article: What to Do if Your Business Gets Sued ]

We’ll explore business legal structures and how to choose the right structure for your organization. 

What is a business legal structure?

A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can have liability ramifications.

Why is a business legal structure important?

Choosing the right business structure from the start is among the most crucial decisions you can make. Here are some factors to consider:

• Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
• Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does not recognize LLC structures; they exist only on a state level. C corporations are a federal business structure that includes the liability protection of LLCs.
• Paperwork: Each business legal structure has unique tax forms. Additionally, if you structure your company as a corporation, you’ll need to submit articles of incorporation and regularly file certain government reports. If you start a business partnership and do business under a fictitious name, you’ll need to file special paperwork for that as well.
• Hierarchy: Corporations must have a board of directors. In certain states, this board must meet a certain number of times per year. Corporate hierarchies also prevent business closure if an owner transfers shares or exits the company, or when a founder dies . Other structures lack this closure protection.
• Registration: A business legal structure is also a prerequisite for registering your business in your state. You can’t apply for an employer identification number (EIN) or all your necessary licenses and permits without a business structure.
• Fundraising: Your structure can also block you from raising funds in certain ways. For example, sole proprietorships generally can’t offer stocks. That right is primarily reserved for corporations.
• Potential consequences for choosing the wrong structure: Your initial choice of business structure is crucial, although you can change your business structure in the future. However, changing your business structure can be a disorganized, confusing process that can lead to tax consequences and the unintended dissolution of your business. 

Types of business structures

The most common business entity types are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here’s more about each type of legal structure.

Sole proprietorship

A sole proprietorship is the simplest business entity. When you set up a sole proprietorship , one person is responsible for all a company’s profits and debts.

“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, vice president and general manager of business acquisitions at Deluxe Corp. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

Proprietorship costs vary by market. Generally, early expenses will include state and federal fees, taxes, business equipment leases , office space, banking fees, and any professional services your business contracts. Some examples of these businesses are freelance writers, tutors, bookkeepers , cleaning service providers and babysitters.

A sole proprietorship business structure has several advantages.

• Easy setup: A sole proprietorship is the simplest legal structure to set up. If you – and only you – own your business, this might be the best structure. There is very little paperwork since you have no partners or executive boards.
• Low cost: Costs vary by state, but generally, license fees and business taxes are the only fees associated with a proprietorship.
• Tax deduction: Since you and your business are a single entity, you may be eligible for specific business sole proprietor tax deductions , such as a health insurance deduction.
• Easy exit: Forming a proprietorship is easy, and so is ending one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a day care center and wish to fold the business, refrain from operating the day care and advertising your services.

The sole proprietorship is also one of the most common small business legal structures. Many famous companies started as sole proprietorships and eventually grew into multimillion-dollar businesses. These are a few examples:

• Marriott Hotels

Partnership 

A partnership is owned by two or more individuals. There are two types: a general partnership, where all is shared equally, and a limited partnership, where only one partner has control of operations and the other person (or persons) contributes to and receives part of the profits. Partnerships can operate as sole proprietorships, where there’s no separation between the partners and the business, or limited liability partnerships (LLPs), depending on the entity’s funding and liability structure.

“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner – like running a restaurant or agency together,” Sweeney said. “A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made as well as those actions made by your business partner.”

General partnership costs vary, but this structure is more expensive than a sole proprietorship because an attorney should review your partnership agreement. The attorney’s experience and location can affect the cost. 

A business partnership agreement must be a win-win for both sides to succeed. Google is an excellent example of this. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading global search engine. The co-founders met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 11.4% of Google provides them with a total net worth of nearly $226.4 billion.

Business partnerships have many advantages. 

• Easy formation: As with a sole proprietorship, there is little paperwork to file for a business partnership. If your state requires you to operate under a fictitious name ( “doing business as,” or DBA ), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. You’ll usually need a business license as well.
• Growth potential: You’re more likely to obtain a business loan with more than one owner. Bankers can consider two credit histories rather than one, which can be helpful if you have a less-than-stellar credit score.
• Special taxation: General partnerships must file federal tax Form 1065 and state returns, but they do not usually pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, affecting each partner’s business share and contribution. If you brought the most seed capital for the business, you and your partner may agree that you’ll retain a higher share percentage, making you the majority owner.

Partnerships are one of the most common business structures. These are some examples of successful partnerships:

• Warner Bros.
• Hewlett-Packard
• Ben & Jerry’s

Limited liability company 

A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying a partnership’s tax and flexibility benefits. Under an LLC, members are shielded from personal liability for the business’s debts if it can’t be proven that they acted in a negligent or wrongful manner that results in injury to another in carrying out the activities of the business.

“Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns,” said Brian Cairns, CEO of ProStrategix Consulting. “LLCs can have one or more members, and profits and losses do not have to be divided equally among members.”

According to Wolters Kluwer , the cost of forming an LLC comprises the state filing fee and can vary depending on your state. For example, if you file an LLC in New York, you must pay a $200 filing fee, a $9 biennial fee, and file a biennial statement with the New York Department of State .

Although small businesses can be LLCs, some large businesses choose this legal structure. The structure is typical among accounting, tax, and law firms, but other types of companies also file as LLCs. One example of an LLC is Anheuser-Busch, one of the leaders in the U.S. beer industry. Headquartered in St. Louis, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewing company based in Leuven, Belgium.

Here some other well-known examples of LLCs:

• Hertz Rent-a-Car

Corporation 

The law regards a corporation as separate from its owners, with legal rights independent of its owners. It can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category. 

There are several types of corporations, including C corporations , S corporations, B corporations, closed corporations, and nonprofit corporations.

• C corporations: C corporations, owned by shareholders, are taxed as separate entities. JPMorgan Chase & Co. is a multinational investment bank and financial services holding company listed as a C corporation. Since C corporations allow an unlimited number of investors, many larger companies – including Apple, Bank of America and Amazon – file for this tax status.
• B corporations: B corporations, otherwise known as benefit corporations, are for-profit entities committed to corporate social responsibility and structured to positively impact society. For example, skincare and cosmetics company The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.
• Closed corporations: Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held companies, have more flexibility than publicly traded companies. For example, Hobby Lobby is a closed corporation – a privately held, family-owned business. Stocks associated with Hobby Lobby are not publicly traded; instead, the stocks have been allocated to family members.
• Open corporations: Open corporations are available for trade on a public market. Many well-known companies, including Microsoft and Ford Motor Co., are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
• Nonprofit corporations: Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These organizations all focus on something other than turning a profit.

Corporations enjoy several advantages. 

• Limited liability: Stockholders are not personally liable for claims against your corporation; they are liable only for their personal investments.
• Continuity: Corporations are not affected by death or the transferring of shares by their owners. Your business continues to operate indefinitely, which investors, creditors and consumers prefer.
• Capital: It’s much easier to raise large amounts of capital from multiple investors when your business is incorporated.

This structure is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you’ve started a shoe company and have already named your business, appointed directors and raised capital through shareholders, the next step is to become incorporated. You’re essentially conducting business at a riskier, yet more lucrative, rate. Additionally, your business could file as an S corporation for the tax benefits. Once your business grows to a certain level, it’s likely in your best interest to incorporate it.

These are some popular examples of corporations:

• General Motors
• Exxon Mobil Corp.
• Domino’s Pizza
• JPMorgan Chase

Learn more about how to become a corporation .

Cooperative 

A cooperative (co-op) is owned by the same people it serves. Its offerings benefit the company’s members, also called user-owners, who vote on the organization’s mission and direction and share profits.

Cooperatives offer a couple main advantages.

• Increased funding: Cooperatives may be eligible for federal grants to help them get started.
• Discounts and better service: Cooperatives can leverage their business size, thus obtaining discounts on products and services for their members.

Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation (e.g., Inc. or Ltd.). The filing fee associated with a co-op agreement varies by state. 

An example of a co-op is CHS Inc., a Fortune 100 business owned by U.S. agricultural cooperatives. As the nation’s leading agribusiness cooperative, CHS reported a net income of $422.4 million for fiscal year 2020. These are some other notable examples of co-ops:

• Land O’Lakes
• Navy Federal Credit Union
• Ace Hardware

Factors to consider before choosing a business structure

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which structure to choose. Consider your startup’s financial needs, risk and ability to grow. It can be challenging to switch your legal structure after registering your business, so give it careful analysis in the early stages of forming your business. 

Here are some crucial factors to consider as you choose your business’s legal structure. You should also consult a CPA for advice.

Flexibility 

Where is your company headed, and which type of legal structure allows for the growth you envision? Turn to your business plan to review your goals and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential. [Learn how to write a business plan with this template .]

When it comes to startup and operational complexity, nothing is more straightforward than a sole proprietorship. Register your name, start doing business, report the profits and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits. Corporations and LLCs have various reporting requirements with state governments and the federal government.

A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means creditors and customers can sue the corporation, but they can’t gain access to any personal assets of the officers or shareholders. An LLC offers the same protection but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year.

“As a small business owner, you want to avoid double taxation in the early stages,” said Jennifer Friedman, principal at Rivetr. “The LLC structure prevents that and makes sure you’re not taxed as a company, but as an individual.”

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the effect on your return. 

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as those for Social Security and Medicare, on your personal return. 

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

Capital investment

If you need to obtain outside funding from an investor, venture capitalist or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.

Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can obtain funds only through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it’s not always necessary for the owner to use their personal credit or assets.

Licenses, permits and regulations

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

“States have different requirements for different business structures,” Friedman said. “Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you’re in. It’s not ‘one size fits all,’ and businesses may not be aware of what’s applicable to them.”

The structures discussed here apply only to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

Max Freedman and Matt D’Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

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Ownership Structure of Business Entities - Explained

Who owns a Business Entity?

Written by Jason Gordon

Updated at April 20th, 2024

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What is the ownership structure for a business entity?

Ownership structure concerns the internal organization of a business entity and the rights and duties of the individuals holding a legal or equitable interest in that business. As owner of the business entity, it is important to understand how the ownership structure of a particular business entity is organized and what that means for the owners rights.

• Example : A shareholder, as owner of a corporation, has certain rights. These rights are distinct from those of members of a limited liability company. Further, within the corporation, a holder of preferred stock may have different rights than the holder of common stock.

Visit the following articles for more information on ownership structure:

• A Detailed Explanation of the Sole Proprietorship
• A Detailed Explanation of the General Partnership
• A Detailed Explanation of the Limited Liability Company
• A Detailed Explanation of the Corporation
• A Detailed Explanation of the Non-Profit Entity

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