Types of Business Ownership

There are several types of business in the UK today. You will most likely already be familiar with some of them, such as public limited companies. However, you may be blissfully unaware of, for example, the advantages of a limited company over a partnership1. This entry aims to educate you.

There are a number of different legal entities under which a business can be owned and operated. We will set forth some of them and some of the advantages and disadvantages of each method of ownership. Since the state codes regarding the forms of legal entities, corporations, partnership, and limited liability companies are being constantly updated, you should check your own state laws if you have any questions about those codes.

The most common form of business ownership for small businesses is a sole proprietorship. It is a business in which all equity lies with one individual. For those states that operate under community property laws, both husband and wife own the business, even though the business license and title may be in only one of their names. If the business owner can clearly establish that the funds to purchase the business came from sources outside of those earned by the “community” (the married couple), then the business is the sole and separate property of that individual whose funds were used to start or purchase the business. With the sole proprietorship type of business ownership, the income of the business becomes the income of the owner and is reported as a part of the owner's personal income and reported on Schedule C of the tax return and is taxable directly to the owner.

When a sole proprietorship is operated under a name other than the owner's name, it is usually necessary to file in the county where the business is located and to obtain a “fictitious name” certificate enabling you to “do business as” under.a name other than your own. This is commonly referred to as “d.b.a.” This registers the name you wish to use and identifies the business owner as the person operating that business under a “fictitious name.” Without having the certificate, most banks will not let you use the business name on your bank account and on your checks. If you ever find it necessary to file suit against a customer for failure to pay a bill with your fictitious name included as the creditor, you will need to produce a current certificate in order for the obligation to be recognized by the court.

One advantage in establishing your business as a sole proprietorship is that it puts you directly in control. There is no board of directors or partners to consult with before making a business decision. It also has the advantage that it is probably the easiest type of business ownership for keeping accounting and bookkeeping records. There are no shareholders meetings or corporate minutes to keep.

When it comes time to Exit your sole proprietorship, another advantage is that the payment for the business goes directly to the owner. In comparison, in the case of a corporation, unless an Entering prospect is buying the stock in your corporation, it is the corporation, which is selling its corporate assets to the buyer, and as a result the funds for the sale go directly to the corporation. For the shareholder in turn to receive any money from the transaction, the individual shareholder must find a method for withdrawing the proceeds from the corporation for the sale of those assets. The main disadvantage of a sole proprietorship is that, in the event of a lawsuit, the proprietor would be personally liable and all of his assets, including the “non-business” assets would be at risk in the event of losing the lawsuit.