Different Forms of Organizations
While many aspire to start their own businesses, most are confused about the legal entity of their business. For those who have asked me about the differences between various forms of businesses, here is a quick, basic, and high level breakdown of the most common legal forms. Please note that in this blog, I avoided listing another form which is non-profit organizations since it is not tied to the previous blog in terms of increasing your personal revenue.
Sole Proprietorship: This form of business is owned by a single person.
Advantages:
Very easy to form.
It is the least regulated legally.
Revenue is taxed only once as personal income.
All profits gained are kept by a single owner.
Disadvantages:
The business is limited to the life of the owner. So if he/she dies, the business dissolves.
The owner has unlimited liability which means creditors can go after his/her personal assets.
It is limited in capital as the owner can use mainly his/her personal wealth or borrow money, which limits many business opportunities due to insufficient funds.
Partnership: This form of business is owned by two or more individuals or even entities.
Advantages:
Relatively easy to form.
Risk is minimized and shared between multiple individuals.
More capital can be raised since there is two or more owners.
Revenue is taxed only once as personal income.
Disadvantages:
The partnership ends when a partner dies.
Relatively more difficult to transfer the ownership of the business.
Corporation: Intends to make an impact and maximize profits for the owner, whether it be one or more individuals or entities.
Advantages:
There is limited liability in the sense that creditors cannot necessarily go after the personal assets of the owners.
A corporation has an unlimited lifespan and transferring ownership is relatively easy.
In general, there is a separation of ownership and management. Owners are usually members of the boards, and if feasible, they hire a CEO and a management staff. Startups are different in the sense that the role of the owners is to manage the organization until it becomes financially feasible for them to hire and recruit a management team.
It is easier to raise capital.
Disadvantages:
There is an agency problem from separation of ownership and management.
Double taxation. Income is taxed at the corporate rate and then dividends are taxed at the personal rate.
There are more but decide between the above as you see fit and depending on your situation. You might also want to consider delegating this task and spending money in order to save yourself valuable time. While this is not meant as an endorsement, but rather to give you a sense of direction, there are many companies that offer online services to register and form your business. One such service that I have used to register two of my businesses is: LegalZoom.com.
Best Regards,
Dr. Mohammed Almathil