The classification of ownership is the first decision made to establish the platform of a business. There are three basic ownership classification in business; Sole Proprietor, Partnership, and Corporation. As a businessperson, we assume certain risks and investment of some kind so it’s important to understand the advantages and disadvantages of each classification to make an informed decision. Factors to consider include business and management skill sets, taxation laws, and liability policies.
Selecting the Best Classification for a Business
Businesses are classified by the structure of its ownership. Based on the issues of the following scenario, we’ll determine the best ownership type for the business. The scenario involves me the inventor who has discovered an innovative application that will revolutionize the use of a particular household appliance. This new idea has a great potential for other uses and applications. Unfortunately, I do not have the knowledge and skills of a businessman much less the financial resources to start a business. I will apply each of business structures to my issues and select the best type of ownership most likely to succeed.
As a Sole Proprietor, the advantage to this type of business is that I will be the sole owner and manager of the entire business. I alone will have full control and flexibility in the direction of where I want to take the business. Profits will be considered personal income which makes filing taxes simple. Although these advantages provide several great benefits, they are outnumbered by disadvantages. Since I have limited resources, I may have to apply for several business loans to fund the start-up costs of the business, purchase parts and equipment for manufacturing the product, and pay rent for office and factory space. These are apparently the simplest and most obvious of tasks yet I do not have the financial expertise to manage these plans. Another major challenge is my insufficient knowledge and experience of the business world. There must be certain rules, regulations, and policies that I’m sure must be adhered to in order for the business to be legitimate. If not covered properly, this could prove very costly to the business if it fails. I’m sure as the owner I will be liable for the legal and financial consequence if the business fails. As a sole proprietor, I understand the life of the business will depend entirely on my constant efforts and contribution. Once I discontinue these efforts for any reason, the business will likely suffer.
Partnership businesses are co-owned by two or more individuals. There are two types of partnerships, general and limited. General partnerships assumes that each partner have equal responsibilities associated with running the business. Limited partnerships provide the means for owners to contribute monetarily rather than physically working with the labor force of the business and/or participating in the decision making process. Limited partners are only liable to what they actually contribute. The partnership type offers several advantages that could provide me the necessities to start and run a business. Having a partner or partners with financial resources means financial relief and I don’t have to invest my net worth entirely to fund the business. Another plus to having partner/s is to use one and others business. In other words, we can divide our responsibilities based on each other’s expertise to a certain area of the business. Since I’m an inventor, I could work on the research, development, and improvement the product, while my partners focus on the business know-how, manufacturing, and financial areas. The leading disadvantage to a partnership type business is when partners are not able to cooperate with each other. It’s highly recommended that partnership type