13 Forms of Business Ownership

V. Abirami

epgp books

 

 

 

1.0 Introduction:

 

A business enterprise is an organization that makes use of economic resources or inputs to offer either product, service or both to the customers in exchange for money, goods or services. There are different forms of business ownerships and it is very crucial to identify the correct form of ownership that may fit a business model and the individual who is involved in the running of that particular business. The reason is, once a model has been adopted for a business enterprise, and then it is very difficult to change or alter the existing model. A careful thought process should precede the selection of a business model.

 

There are three types of businesses namely

 

1.1 Service Business

 

Service in terms of consultancy through professional skill sets, expert advice and guidance for the clients in places such as educational institution, banks, and law firms. Business Travel Management services, Event Management are some of the service business that are in vogue at present.

 

1.2 Merchandising Business

 

Products, when sold at retail or wholesale to the customers leading to gaining profit by increasing the selling price of the product than the cost price is Merchandising Business. Some of the commonly recognized merchandising business providers are Wal-Mart, Home Depot and Dillard’s.

 

1.3 Manufacturing Business

 

While merchandising business sells finished products for use by customers, manufacturing businesses looks at procuring products from various places, and use them as raw materials to assemble a finished product. Boeing and Ford are some of the well known brands in Manufacturing Business.

 

1.4 Hybrid Business

 

When companies come under more than one of the above mentioned categories, then they are called the hybrid business. For example, a restaurant come under manufacturing business when they procure different ingredients from different vendors, assimilate them to prepare a meal. But they can also be classified as merchandising business, when they sell a coke tin procured from the manufacturer or the dealer distributor.

 

Business ownership depends on the kind of company, objectives of the owners and their future aspirations. There are also a number of other influencing factors such as capital investment requirements, organisation structure, tax, liability and management of the business operations. Based on these factors, there are a number of business ownerships. No single business model can satisfy all of the above parameters to run a business. So one should trade off a few parameters which may not play a crucial role in running a particular business, and instead focus on the top priorities.

 

2.0 Sole Proprietorship

 

When an individual owns and runs the business, receives all profits out of the business and is solely responsible for all debts and losses, then such a business is termed as Sole Proprietorship. It is the most common form of business ownership across the world as it is the simplest of all.

 

The individual who runs this sort of sole proprietorship business can use a business name or a trade name instead of his legal name. In certain countries, it is mandatory to display the name of the Proprietor at the business premises, business communication etc…

 

Some  common  Sole Proprietorship businesses  include  home-based  businesses,  running boutiques, kiosks and local restaurants, consultants etc….

 

2.1 Advantages of Sole Proprietorship

 

Easy Formation: It is a less strenuous process to start a sole proprietorship business than a corporate. It is also much nominal in terms of capital investment.

 

Employment Opportunities: When a sole proprietor is involved in hiring employees, though in small numbers initially, it leads to job creation. Such a move can also help in bring down the tax paid to some extent.

 

Decision & Control: The business decisions are totally controlled by the owner and he or she can anytime transfer the ownership as they deem necessary without any complexities involved.

 

Tax Benefits: A separate business tax report need not be filed by the sole proprietor. He/She has list the business information and transactions within their individual tax return. Furthermore, the income raised out of sole proprietorship is taxed under personal income whose tax rate is lesser than corporate tax.

 

2.2 Disadvantages of Sole Proprietorship

 

Unlimited Liability: Unlike a corporation or LLC, sole proprietorship does not exist as a separate legal entity. Hence every asset of an individual gets linked to the business run. Therefore, if a sole proprietor goes bankrupt, even when there is no money left in the business, then his other assets shall be used to pay the debt. Therefore, when an individual opts for a higher risk business projects, then it is ideal to opt for corporate structure business plan rather than sole proprietorship

 

Difficulty in raising investments: The capital investment is made by the proprietor. But later, when the business grows in a couple of years, it might become a tedious process to generate capital as sole proprietorship businesses cannot issue stocks or any other strategies to raise the capital like the corporate.

 

Lack of Perpetuity: If the proprietor becomes deceased or incapacitated, then the business may not continue. It may become part of the proprietor’s personal wealth and be distributed to the beneficiaries.

 

Work Life Balance: Sole owners may get drowned in their business and hence may find it difficult to juggle between personal life and business commitments. Even if they get away from business for a holiday, still they may have to monitor the business through digital technology.

 

3.0 Partnership

 

When two or more individuals come together as partners through an agreement to start a un-corporated company, then such a business model is said to be partnership business. There are different types of partnerships in business, primarily with reference to personal liability. They are

 

(i)   General Partnership (GP)

(ii)   Limited Partnership (LP)

(iii)   Limited Liability Partnership (LLP)

(iv)   Limited Liability Company (LLC)

 

3.1 General Partnership (GP)

 

In a general partnership business, each partner represents the organisation during business transactions with external world and each partner has equal right to participate in decision-making, management and finance control. When a new partner is inducted, it has to be approved by all the existing partners. In general partnership, profit and liability is distributed equally

 

3.2 Limited Partnership (LP)

 

A general partner and a limited partner can collaborate to run a business under Limited Partnership. A limited partner has limited or no power to manage the business. Further they are not entailed to earn equal returns when compared to that of general partners. The advantage of being a limited partner is that, he/she may be more secured during liability and debt as only the general partner’s personal asset may be at risk.

 

3.3 Limited Liability Partnership (LLP)

 

LLP offers both liability protection and partnership tax benefits. Especially in terms of liability, an LLP business can be sued for the total worth of assets in the business and not beyond that. If a client consumes the food served in your restaurant and falls sick, he/she cannot receive more than the total value of your restaurant.

 

3.4 Limited Liability Company (LLC)

 

A business owner can gain the maximum under LLC in terms of tax benefits and liability. When a business is run as an LLC, the company enjoys the tax protection as a partnership business while cashing in on the liability protection similar to a corporation. To further elaborate in the liability protection, under corporate law, a corporation is liable only for the total start-up investment and not the current net worth.

 

3.5 Creating Agreements

 

Partnership business, similar to sole proprietorship shoulders risk and hence it is natural to enter into a partnership agreement to govern the business. Some of the components involved in business partnership agreements are:

 

3.5.1 Annual Account: This is mandatory for each partner to collaborate with the others to settle the company’s accounts and debts at the end of each financial year.

 

3.5.2 Management: Majority of the partners shall have to authorize any business decision made in the organisation in order to avoid one individual taking an upper hand in controlling the organisation.

 

3.5.3 Persistent Interest and Time: Every partner should agree to spend a certain amount of time and interest in the business for the overall progress of the business enterprise.

 

3.5.4 Expulsion of Partner/s: When the behaviour or conduct of a partner is inappropriate, then it may be indispensible to remove the individual from the business partnership. If one of the partners lavishly spends on travelling only in the business class and indulges in abusing the shared resource, then it might lead to the expulsion of that partner.

 

3.6 Advantages of Partnerships

  • Partnership businesses are easier to establish when compared to sole proprietorship
  • The funds or the capital investment can be easily generated when there are more than one person involved in the process.
  • Collective intelligence and workforce is believed to yield better results.
  • Employees with high calibre can be invited to become partners in the business thereby leading to a progressive business venture.

 

3.7 Disadvantages of Partnerships

  • Disagreements and Disputes are important threats to partnership businesses as each individual is likely to differ in their idea or opinion on what works best for the business to progress, and it may adversely affect the business.
  • Partners usually seal an agreement and owing to which, under some circumstances, there is less or minimal freedom towards management decisions for the individual partners.
  • Partnership businesses are under the threat of unlimited liability thereby making every partner accountable for the losses incurred in the business.
  • In terms of taxation, partners must pay taxes similar to that of sole proprietorship, by submitting the self-assessment every year. If the turnover is more than a stipulated level, then the percentage of personal taxation is liable to increase than that of a limited company.

 

4.0 Corporations

 

Corporation is an independent legal and tax entity which distincts itself from the people who own and manage the business. Being independent of the owners, corporation solely pays the taxes incurred and does not use the personal tax returns of the owners. But the owners have to pay tax for the income generated from the corporation in the form of salaries and bonuses.

 

4.1 Private Limited Company

 

Owners can subscribe for a share by paying a share capital fees, thereby becoming the share holders on the company. The personal liability of a share holder is confined only to the share capital and not beyond that. Usually, in terms of investments, Private Limited Companies are preferred by Venture Capital investors as the degree of separation between ownership and operations is greater than other forms of businesses. Hence the investors can exit the company by selling shares without being liable for company affairs. Some common private limited companies are Snapdeal, Ola, Carat Lane and Flipkart. With the advent of venture capital in India, several reputed companies like MuSigma and Flipkart have stayed as Private Limited Company for quite a long time.

 

4.2 Public Limited Company

 

The number of shareholders of a Public limited company can be unlimited. It can either be listed in a stock exchange or can remain as an unlisted company. The share holders are allowed to freely trade their shares on the stock exchange. But Public Limited Companies are bound to have more public disclosures and compliance from the government. Also, it is mandatory to appoint Directors to run the day-to-day operations of the company. With a global ranking rank of 142, Reliance Industries tops the list of Public Limited Company in India, followed by State Bank of India, Oil and Natural Gas Corporation and ICICI Bank.

 

4.3 Advantages of a Corporation

  • Shareholders have limited liability for the debts incurred by the corporation. Therefore the share holder will not lose more than the amount he/she has contributed to the corporation.
  • Due to limited liability, potential shareholders can easily be attracted thereby raising large amount of investment.
  • The corporation can continue to exist even after the life-time of the investor and hence the stability of the corporation is ensured.

 

4.4 Disadvantages of a Corporation

  • It is more expensive to set up a corporation than any other forms of business.
  • The documentation to be made and submitted to the government could be elaborate and extensive.
  • If the corporation fails to meet the requisites as stipulated by the government, the government is entitled to dissolve the corporation.

5.0 Non-profit Corporation

 

Corporation that carry out charitable, social, literary, religious or educational purposes is called Non-profit Corporation. They raise the funds by soliciting public grants and donations from individuals and organisations. Due to the contributions made to the society by these non-profit corporations, they are usually not taxed by the government. Some of the reputed non-profit organisations in the world include Amnesty International, Red Cross, The Rotary Foundation and World Wildlife Fund (WWF).

 

6.0 Franchising

 

A hybrid model that combines the sole proprietorship and corporation business model is franchising. A business owner can sell the rights to use the brand name or the business model to another person instead of building a similar model himself. It is also advantageous for an individual to enter a franchise business model as he/she shall be treading on a successful business plan. Based on the ways and means by which the franchisors permits the franchisees to use the brand name, there are three types of franchises.

 

6.1 Business Format Franchises

 

When the franchisor extends the business by supplying the franchisee with the established business blueprint, and assists the independent owner to launch and run the business by paying fee and/or royalty, then it is called a Business Format Franchise. The supplies are also bought from the franchiser in most cases. McDonalds, KFC and Pizza Hut are run under this model.

 

6.2 Product Franchises

 

The franchisee enters into an agreement to by paying the fees stated by the franchisor and buys a minimum amount of products to be sold in their outlet. Here the manufacturer or the franchisor controls the retail store by distributing their products and allowing them to use their brand name and trade mark.

 

6.3 Manufacturing Franchises

 

A manufacturer is permitted to manufacture and sell a product using the franchisor’s brand name and trade mark. This is a common type of franchise that the food and beverage industry enters in such as Coco-cola which sells the syrup concentrate to a company, who mixes it with water, bottles and sells it.

 

7.0 Cooperatives

 

Cooperatives are democratic, independent organisations in which each member has equal control and rights. When group of individuals collaborate for social, cultural and economic objectives, and as a business model, it can be applied to a wide variety of other circumstances. If run judiciously, an increase in the profit for its members is inevitable. Cooperatives are quite common among the agrarian community. For instance, the dairy producers market their dairy product, predominantly milk through these cooperative societies and they also procure products they need for dairy such as forage crop seeds, fodder, cattle feed and equipments through these cooperatives. Cooperatives also exist beyond the agriculture communities. Amul, the Gujarat cooperative of milk and milk product is the biggest cooperative in India at present and Aavin is the Tamil Nadu Cooperative Milk Producers’ Federation Limited. Some of the cooperatives from other countries include Edinburgh Student Housing Cooperative in United Kingdom and National Rural Utilities Cooperative Finance Corporation in the United States f America.

 

8.0 Mergers and Acquisition

 

An important means of accelerating the business growth in the recent times is to merge with or acquire another company. Most companies prefer this mode of business as it results in exponential growth as the combined company is more valuable in every possible means than existing as two separate companies. When two companies combine to form a new company, then a merger occurs. When one company purchases another company, then acquisition occurs.

 

US Airways and American Airlines came together and merged to become a combined company and presently it flies under the brand American Airlines. In India, Reliance Communications merged with Maxis Communications Berhad and after the merging both the companies hold 50% percent share in the new entity formed. Adidas acquired Reebok and after acquisition, the company Reebok ceased to exist. But, Adidas continues to manufacture shoes under the brand ‘Reebok’. An important global acquisition of 2016 is Google acquiring Moodstocks and the latter joined Google’s R&D Centre in Paris and contribute to the progress of YouTube and Google Chrome.

 

The reasons for Merging and Acquiring could be the following.

  • In order to gain the complementary products manufactured by one company, another company could either merge with or acquire the company producing the products.
  • In order to reach out to a wider market, a company with a wide reach in a particular market can merge with or acquire another company which has a monopoly in another market.
  • When two companies come together it results in better synergy such as cost cutting in terms of removing redundant positions, using the best of the talent pool from both the companies, and the like.

 

In some cases, a hostile takeover can happen a company can be purchased by another even though the management and Board of Directors are not willing to be acquired.

 

9.0 Summary:

 

A sole proprietorship, a business owned by only one person. A general partnership is a business owned jointly by two or more people. A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment. A corporation is a legal entity that’s separate from the parties who own it, the shareholders who invest by buying shares of stock. A cooperative is a business owned and controlled by those who use its services. A not-for-profit corporation is an organization formed to serve some public purpose rather than for financial gain. A merger occurs when two companies combine to form a new company. An acquisition is the purchase of one company by another with no new company being formed.

 

10.0 Questions to ponder:

  1. Which of the following are the disadvantages of sole proprietorship?
  2. a) unlimited liability for the owner
  3. b) easy and inexpensive to form
  4. What are the three types of franchises?
  5. Differentiate Limited Liability Company (LLC) from Limited Liability Partnership (LLP)
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