Business ownership comes in more forms than most people realize. A business owner might have sole ownership of their business or share it with others. Some owners may be responsible for making all of the business decisions, while others might be passive investors. If you're looking to start, own or co-own a business, your first step is to understand the different types of business ownership. The daily lives of different types of business owners can vary drastically from one another, so it's important to know what you're signing up for.
Types of Business Owners
A sole proprietor is someone who is operating a business alone. A sole proprietor maintains sole ownership of a business, and is also responsible for running the business itself. A sole proprietor is the owner, operator, and only member of a self-run business. Sole proprietors are one of the most common types of small business owners, since the barriers to sole proprietorships are low and they require very little licensing.
Benefits of being a sole proprietor
The benefits of being a sole proprietor are fairly straightforward:
- You maintain sole ownership of your business
- All profits are yours to keep
- You get to make all business decisions
- Very easy to set up - simply by starting a business and running it alone, you've formed a sole proprietorship
Downsides of being a sole proprietor
- You have to do all of the work
- All business losses and expenses will likely come from your own pocket
- You don't have the expertise or guidance of others to rely on
- Difficult to scale up or hire employees
Sole proprietors work best for:
The sole proprietorship business ownership model works best for people who plan to run highly automated or low-maintenance businesses, such as an ecommerce website. Sole proprietors should be ready to fund their own business idea, as it's rare for sole proprietorships to get any sources of external funding. They should also be ready to make all business decisions alone, although they may rely on third-party contractors for some work (like legal advice or accounting help). In order to be a successful sole proprietor, you must have a well-thought-out business model and the commitment to stand by your business. Since all losses and profits are yours and yours alone, a sole proprietorship has the potential to make you very wealthy if successful (or saddle you with a large bill if you're unsuccessful).
The daily life of a sole proprietor is typically quite busy, especially during the stages of business creation and growth. Since a sole proprietor has no one else to help with running the business, they need to be able to do a lot of different things well, from setting up their website to running their own marketing or advertising campaigns. Since their most limited asset is typically their own time, sole proprietors will benefit immensely from tools that automate or improve daily operations, like automated shipping or inventory control.
A partner has decided not to go it alone, and will work with others to make a successful business. The types of partnerships and the level of responsibility shared by each partner is quite flexible, but the most common types of partnerships are General Partnerships, in which both owners share some level of responsibility for operating the business, and Limited Partnerships, in which one person typically runs the business while another only invests.
Benefits of being a partner:
- You can rely on your partner(s) for help with running or funding the business
- This business model is easy to set up
- Very flexible in terms of dictating ownership and responsibility
- Can be used to secure an outside investor in exchange for a portion of ownership
Downsides of being a partner:
- Two-person partnerships can result in many 'tied votes' or disagreements on how to run the business
- It's highly recommended that you sign a formal partnership agreement
- Can become liable for debts or expenditures accrued by other partners
- Requires a high level of trust & ability to work together
Partnerships are best for:
Partnerships are best for 2-3 people who want to pool their expertise or resources in order to start a company. You'll need to make sure that you trust the people you're going into business with - in a general partnership, all responsibilities and liabilities are split equally among members. If you're considering becoming a partner, you'll also need to be prepared to work well with others and rely on democracy & discussion to make business decisions, since you won't have sole say on how the business is operated. No matter what type of partnership you set up, we highly recommend a formal partnership agreement to cleary define each partner's responsibilities and level of liability, as well as ensure that a process for voting or managing disagreements among partners is established.
The daily life of a partner can vary greatly - some partners may act very similar to sole proprietors, in which they have the sole say over what to do and how to do it (although they'll have an external investor). Other partners may act in small teams, or may act mostly independently of one another but share resources like office space (such as lawyers' offices with several partners). However, it's common for even independent partners to share resources and knowledge with other partners, since one of the major benefits of becoming a partner is the ability to specialize and rely on the specializations of your other partners. If you're considering becoming a partner, make sure to create or fully understand your part of the partnership agreement.
A Limited Liability Corporation, or LLC, is one of the most popular types of businesses for small- to medium-sized teams to start a business. Designed to be easy to set up, an LLC will allow its members to share liability for a company while delegating control of daily business operations to a managing member. In essence, it allows small businesses to assume a more formal corporate structure without requiring all of the paperwork and oversight needed to become a full corporation.
Benefits of becoming an LLC member
- Very flexible in terms of dictating individual responsibility
- Daily operations handled by a managing member
- Profits and losses shared by members, reported on personal tax returns
- Easy to set up
Downsides of becoming an LLC member
- Liability is shared among members, so you might be responsible for losses incurred by another member
- If key members leave, you might have to dissolve the LLC and create a new one
- If you are a non-managing member, your ability to make business decisions might be limited
- If you are a managing member of your LLC, you'll be exposed to greater legal liability than non-managing members
Joining an LLC is best for:
Becoming a member of an LLC is best for anyone who wants to start or join a company with a small to medium-sized team (typically 2-10 members) without needing to jump through a lot of legal hoops. LLCs are very flexible in terms of overall structure, and can share the responsibility of daily operations among all members or delegate it to a single member.
It's highly recommended that all LLCs have operating agreements that clearly define the roles, responsibilities, and levels of liability for all members, as well as lay out guidelines for how to manage the company and make group decisions. If you'd like an additional degree of insulation between you and your businesses' legal and financial liabilities, an LLC may be the right choice.
LLC Managing Member
An LLC requires at least one managing member, who oversees daily operations of the LLC. Managing members have the authority to act as an agent of the company, which allows them to conduct business in the name of the company. This can include everything from daily operations (like making a product or mopping the floor) all the way up to managerial decisions, such as hiring employees or entering into contracts with other companies or individuals.
The managing members of an LLC are responsible for making the company successful. As such, their duties and responsibilities tend to be many and varied. Depending on the LLC and the members that make it up, the daily life of a managing member will vary depending on what responsibilities were laid out in the operating agreement.
From a legal perspective, managing members face a slightly greater degree of liability than non-managing members. Managing members are protected from lawsuits from other members of the LLC during the conduction of normal business, but if the LLC finds that a managing member's behavior caused injury to the company, he or she can be sued by the LLC for damages. Additionally, managing members may be more vulnerable to lawsuits from external sources, as they have greater visibility in the conduction of business.
If the above is scaring you off from becoming a managing member of an LLC, let us assure you that this form of business owner is quite common, and you can protect yourself and your company from suits by making sure that you use well-structured contracts, operating agreements, and terms of agreement. We recommend a service like LegalZoom to help you get the legal side of things sorted out.
Corporation Board Member
Corporations are large, complex businesses that dictate decision-making authority to a board of directors, who are responsible for creating the company's by-laws. Board members are also responsible for setting the high-level goals and mission of a company, as well as setting up its leadership structure. This type of business ownership typically results in a high degree of decision-making power and a lot of meetings, but little to no work on the daily operations of the corporation. These positions also tend to be some of the most difficult to obtain, especially within larger corporations. Unless you're a career exec or wealthy investor, it's probably best to set your sights on one of the other types of business ownership listed here.
One of the most common (and most overlooked) forms of business ownership is to become a shareholder in a corporation - to own stocks in that company. Depending on the size of the company and the number of stocks issued, you might be the sole owner of a corporation (if you hold 100% of the shares) or share your ownership with thousands or millions of others. Shareholders typically have a very hands-off, 'investor only' role unless they control a large percentage of the stocks issued. If you're looking for the quickest and easiest way to become a (partial) business owner, all you need to do is buy some stocks!
Types of Business Ownership, Summarized
While you'll always need to ensure that the type of business and type of business ownership you select matches your personal and business needs, here's a quick summary of business ownership types and their most important features:
- Sole Proprietorship: Best ownership type for someone wanting to open their own small business. Very easy to set up.
- Partner: Best ownership type for someone who wants to open a small business with a partner. A partner may help run the business or only act as an investor.
- LLC Non-Managing Member: Best ownership type for someone who wants to invest directly in a small business without worrying about daily operations.
- LLC Managing Member: Best ownership type for small groups of people looking to go into business together. Managing members will be involved in daily operations.
- Corporation Board Member: Best ownership type for the highly experienced or well-off. Typically requires a long history with a company.
- Corporation Shareholder: Best ownership type for someone who simply wants to invest in others' businesses. All stockholders are partial business owners.
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