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ownership and structure business plan

Business Ownership

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Starting a business is a big decision that comes with a lot of challenges. The first challenge business owners face is deciding the ownership structure they want to use. This structure will be heavily influenced by the type of business ownership employed.

Each business ownership type has its unique advantages and disadvantages which contribute to the decision-making process. Understanding ownership is essential before setting up your own business. Let's take a closer look.

What is business ownership?

Business ownership provides a management framework for business owners. Thus, understanding the various types of ownership is essential to these folks.

Business ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions.

The legal structure of a business is crucial in its ramifications, so it must be understood and planned out carefully. The decisions involved impact daily operations, taxation, and the level of risk.

The legal structure is the framework through which a business is defined in a particular jurisdiction.

Types of business ownership structures

There are six basic types of business ownership structures:

Sole Proprietorship

Private limited companies (LTD)

Public Limited Companies, PLC

Not-for-profit organisation

Cooperatives.

Let's examine the structures in a bit more detail, along with some advantages and disadvantages of each.

1. Sole proprietorship

This is the most common form of business ownership and the simplest. Sole proprietorship means that a business is owned and directed by one individual. This individual owns all the rights to run the business however they deem fit. In other words, if you start a brand new business, and you are the only person owning and running the business, it is considered a sole proprietorship ( sole trader ).

Advantages of a sole proprietorship

All income earned belongs to the sole proprietor, who also owns all business assets.

It is the simplest of all the business structures to set up.

It provides the proprietor with flexibility in running the business.

The sole proprietor gets to make all business decisions.

Absence of corporate tax.

Disadvantages of a sole proprietorship

The proprietor bears personal responsibility for all business debt and losses.

There is little to differentiate between personal and business income.

Raising capital is the responsibility of the sole proprietor.

2. Partnership

This business ownership structure means two or more people own a business. Partnerships are of two types, namely:

General partnership - this involves an investment from all partners, and all partners bear the responsibility for any debt incurred by the business. The partnership usually doesn’t need a formal agreement as it could be verbal between business owners.

Limited Liability Partnership, LLP - LLP provides protection for each partner against debt incurred by the other partner(s). It usually requires a formal agreement between partners to protect each from the actions of the others.

Advantages of partnership

Business capital can be easily generated from each partner's resources.

Profits from services offered by the business are shared between partners.

Ownership and decision making are shared by partners .

Greater capacity for loans.

Disadvantages of partnership

Partners are responsible for losses or debt incurred by the business.

The risk of friction among partners can be high.

Partners can be held liable for the actions of other partners.

3. Private limited company/LTD

A private limited company - also referred to as LTD - is an incorporated business entity that is privately held and controlled. The ownership of the business is divided by shares in the company. Those who own the shares are known as shareholders.

This type of business ownership provides limited liability to the owners. Limited liability provides the shareholders' personal assets with protection from liabilities incurred by the business.

Advantages of private limited companies

Private limited companies provide limited liability to their shareholders.

Shares cannot be sold to the public (the current owners decide to whom they will sell them). Therefore the company is protected from loss of ownership and control.

Due to incorporation, LTDs can continually exist even after the death of an owner.

Disadvantages of private limited companies

Shares can only be sold in-house, and can’t be traded with the public.

It is expensive to set up due to administrative and legal costs.

They must be registered with the company registrar.

Legal paperwork is necessary for starting up an LTD.

4. Public Limited Company/PLC

A public limited company - also known as PLC - is a business ownership style unique to the United Kingdom, although it is equivalent to what is known as corporation in other countries. A PLC is an incorporated business, meaning it exists legally as a separate entity from its owners. It also has limited liability, as it offers protection to its shareholders from business liabilities.

A PLC is managed by a board of directors and owned by shareholders. A PLC's shares can be traded with the public on the stock exchange.

Advantages of limited liability companies

Capital can be easily generated through trading shares publicly.

Owners have limited liability.

Publicly listing shares makes it easier to attract investors.

Disadvantages of limited liability companies

Anyone who can afford to buy a share can be a shareholder .

A board of directors is needed to run the organisation.

They are exposed to public scrutiny and regulations.

They may be at risk of a takeover if someone buys up a majority of the shares available.

5. Non-Profit

A non-profit organisation has been established for purposes other than profit generation. The organisation's generated income does not go to the owners or members. Examples include Amnesty International and the Boy Scouts.

Advantages of a non-profit organisation

It easily attracts talent interested in the mission of the organisation.

Non-profit organisations are exempt from paying corporate income tax if they meet the necessary criteria.

Owners of the organisation are protected from personal liability.

Disadvantages of a non-profit organisation

Raising funding for projects can be complicated.

Non-profit organisations can face immense pressure from stakeholders.

The financial spending of the organisation is open to scrutiny from the public.

6. Cooperative

A cooperative is a business structure whose owners are consumers of its services. It is operated to provide benefits to those people. It often aims to pursue economic, social, or cultural goals.

Examples of cooperatives include community-owned stores and farms such as Anglia Farmers or supporter-led sports clubs.

Advantages of cooperatives

They are relatively easy to start.

Management style is democratic, with each member having voting rights.

Funding is internal, hence responsibility is shared among members.

Disadvantages of cooperatives

Independent of the amount invested, all members have equal voting rights.

There is a limit to sharing dividend payments.

There is the risk of rigid business practices.

Over-reliance on internally generated funds.

Factors to consider in choosing a business structure

In choosing a business structure best suited to your business, the following factors should be considered:

1. Start-up finance

The cost of setting up a business increases proportionally to the amount of legal paperwork. One important factor to consider when choosing a business structure is the amount of money you are willing to invest in the initial setup costs.

2. Number of owners

The amount of owners you are willing to involve in the management of your business is also an important factor to consider. Then you can custom-fit your business ownership structure to one of the many available - whether for one or 100 owners.

3. Liabilities

The need to protect your personal assets from debt makes business risk and liability an important consideration. Sole proprietorships and certain types of partnerships face unlimited liability, meaning that the owners are personally liable for any debts the business incurs.

On the other hand, incorporated companies have limited liability , meaning the owners are not personally liable for the company's debt. For owners looking to build a business with limited liability , a limited liability company or a corporation might be best .

4. Business ownership transfer

A sole proprietorship rarely outlives its owner. Considering whether you want your business to keep running after you are gone is also important. If you are looking to pass ownership to your family or children, the kind of business ownership structure you choose will be absolutely crucial.

Business ownership examples

Real-world business ownership examples by type:

Now let's take a look at some examples in more detail!

Public Limited Company example

General Motors has a public limited company structure, meaning that its shares can be traded publicly. The company specializes in automobiles, and it is ranked amongst the top ten Fortune 500 companies. It is the parent company to famous brands like Chevrolet, Cadillac, and Opel.

Business Ownership Example StudySmarter

Partnership example

Red Bull decided to create a partnership with GoPro, as the two lifestyle brands have shared interests. Both brands are about adventure, a fearless approach, and lots of action. Under the terms of the agreement, Red Bull will receive ownership interest in GoPro, and GoPro will become the exclusive supplier of point-of-view imaging technology for Red Bull's media productions and events.

In conclusion, there are six business ownership structures, each with its own advantages and disadvantages. Depending on the type of business you are looking to run, the structure you employ will be a major factor in the success of your business entity.

Business Ownership - Key takeaways

Ownership of a business refers to the legal control over a business. It gives the owner or the legal capacity to dictate the business operations and dealings.

There are six major business ownership structures namely:

Each form of business comes with its own set of advantages and disadvantages.

Start-up finance

Frequently Asked Questions about Business Ownership

--> what is business ownership.

Business (company) ownership refers to legal control over a business. It gives the owner the legal right to make certain business decisions.

--> What are the 6 basic forms of business ownership?

There are six most common forms of business ownership:

Sole Proprietorship

--> What is the most common form of business ownership?

Sole proprietorship is the most common form of business ownership and the simplest.

--> What are the factors that determine business ownership?

There are four factors to consider while choosing business ownership, and they are:

Business ownership transfer

--> Which is the simplest type of business ownership?

Sole proprietorship is the simplest type of business ownership.

--> What does PLC mean in business?

PLC in business means Public Limited Company, and it is a business ownership structure unique to the United Kingdom. It is equivalent to what is known as corporations in other countries. It has limited liability, as it offers protection to its shareholders from business liabilities.

Final Business Ownership Quiz

Business ownership quiz - teste dein wissen.

Business ownership refers to legal control over a business. It gives the owner the legal capacity to dictate the business operations and dealings.

What is the simplest business ownership structure?

Sole proprietorship

Cooperative is a form of business ownership structure?

List the basic forms of business ownership structure

Sole Proprietorship

Limited Liability Companies, LLC

Give two disadvantages of sole proprietorship

1. The proprietor is bears responsibility for all business debt and losses

2. There is mostly little to differentiate between personal and business income

Explain sole proprietorship

Sole Proprietorship involves a business being owned and directed by an individual. The individual owns all the rights to run the business however he/she deems fit.

What are the two forms of partnership?

General partnership and limited liability partnership

Explain limited liability partnership

LLP provides protection for each partner against debt incurred by the other partner(s). It usually requires a formal agreement between partners to protect each partner from the actions of other partners.

Profits generated from non-profit corporations are shared among the board

What is a limited liability company?

This is a flexible business ownership structure which employs practises from corporation, sole proprietorship and partnership providing minimal liability.

Give one advantage and one disadvantage of LLC

Advantage of LLC - Limited liability provide option for owners to control how the business is run

Disadvantage of LLC - Due to legal filings, starting up a limited liability company may prove expensive

Explain the business ownership structure, cooperative

Cooperative is a business structure whose owners are people who use its products or/and services, and is operated to provide benefits to these people. Income and profits are usually distributed among its members.

What are the factors that should be considered when choosing a business ownership structure?

Factors that determines business ownership are -

Number of owners

Business ownership transfer

Give one advantage and one disadvantage of PLC

Advantage of PLC - Capital can be easily generated through trading shares publicly

Disadvantage of PLC - Anyone who can afford to buy shares can be a shareholder

what does it mean for a business to be incorporated?

An incorporated business exists as a legal entity independent of its owner. Meaning it can take loans, it can sue individuals or businesses, it is liable to its own debts.

Not for profits organization legal entities that

Are created for purposes other than profits generation

PLCs are runned by …

A board of directors

A LTD is a private incorporated organization that doesn’t make its shares public

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Business Ownership Structures

When forming a business, its legal structure is one of the owner’s most important practical decisions. Each type of structure has its own benefits and considerations that are affected by the business' size, the number of owners and employees, the industry, and other variables. Each state passes its own business formation laws, and not all states allow for every type of business structure. This means that the requirements for forming a particular type of business vary from state to state.

Sole Proprietorships

A sole proprietorship is the simplest kind of business. Most sole proprietorships are small businesses that have one employee — the owner. Forming a sole proprietorship is usually easy. In fact, in many states it requires no special action. Doing freelance or independent work under your own name is usually enough to form a sole proprietorship.

Two major benefits of structuring your business as a sole proprietorship are simplicity of formation and taxes. Since there usually are no formal steps required to form a sole proprietorship, there is no cost involved. Also, owners of sole proprietorships count the business’ income on their personal income tax returns. One drawback is that sole proprietorships do not offer any legal protection to their owners.

Partnerships

When two or more people start a business together, they can form a partnership. There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships. In addition, joint ventures have some aspects of partnerships. The amount of money contributed, control exerted over the business, and legal liability vary depending on which type of partnership is formed.

To form a partnership, most states require partners to register the business with the secretary of state. It is also important for the partners to formalize their relationship in a partnership agreement, which is a contract that addresses the major aspects of the business, including how it will be run, how profits are split, and what to do in the case of dissolution.

Consulting a lawyer experienced in business formation will give a business owner or potential owner a better understanding of each business structure in the context of their unique business situation. Justia offers a lawyer directory to simplify researching, comparing, and contacting attorneys who fit your legal needs.

Corporations

There are generally two types of corporations: C corporations and S corporations. Larger businesses with multiple employees are often structured as C corporations, whereas many smaller businesses choose to organize as S corporations. The primary difference between an S and C corporation is how taxes are paid. C corporations are taxed as independent entities. The income of an S corporation “passes through” to the individual tax returns of its owners. An LLC may choose to treat itself as an S corporation for tax purposes.

Non-Profit Organizations

The basic definition of a non-profit organization is a business that does not pass on excess revenue to owners, shareholders, or other investors. Instead, a non-profit uses this money to further its mission, which includes paying the salary of its owners and other employees.

Many non-profit organizations choose to incorporate to obtain federal and state tax exemptions, grants, and other benefits. One of the most common types of non-profit organizations is a 501(c)(3), named after a section of the IRS code, but there are other types.

Discover answers to frequently asked questions about business operations and formation.

Franchises are not a traditional business structure like the ones described above. A franchise is a business that licenses the name, logo, trade secrets, or other aspects of an existing business. For example, most fast food restaurants are franchises. In many cases, a person starting a franchise forms an LLC, partnership, or S corporation, and that company becomes the entity that pays the larger company for the right to use the name.

Last reviewed October 2022

Small Business Contents

Business Plan Tutorial: Types of Business Ownership

This article provides an overview of the most common types of business ownership. There are basically three types or forms of business ownership structures for new small businesses:

1. Sole Proprietorship

A business owned and operated by a single individual -- and the most common form of business structure in the United States.

The advantages with a sole proprietorship include ease and cost of formation -- simply announcing you are in business and requesting any licenses and permits you may need; use of profits -- since all profits from the business belong exclusively to you, the owner; flexibility and control -- you make all the decisions and direct the entire business operations; very little government regulations; secrecy; and ease of ending the business.

There are disadvantages, however, including unlimited liability -- all business debts are personal debts, meaning you could lose everything you own if the business fails or loses a major lawsuit; limited sources of financing -- based on your creditworthiness; limited skills -- the sole proprietor really must be a "jack-of-all-trades," part manager, marketer, accountant, etc.; and limited lifespan -- the business ends when the owner dies.

2. Partnership

A business that is owned and operated by two or more people -- and the least used form of business organization in the United States.

There are two basics forms of partnerships, general and limited. In a general partnership, all partners have unlimited liability, while in a limited partnership, at least one partner has liability limited only to his or her investment while at least one other partner has full liability.

Most states require a legal document called the "Articles of Partnership" that delineates details about each partner's investment and role in the new company.

The advantages of a partnership include ease of organization -- simply creating the articles of partnership; combined knowledge and skills -- using the strengths of each partner for better business decision-making; greater availability of financing; and very little government regulations.

There are disadvantages, however, including unlimited liability -- all business debts are personal debts; reconciling partner disagreements and action -- each partner is responsible for the actions of all the others; sharing of profits -- all money earned has to be shared and distributed to the partners per the articles of partnership; and limited lifespan -- the partnership ends when a partner dies or withdraws.

3. Private Corporation

A business that is a legal entity created by the state whose assets and liabilities are separate from its owners.

While there are also public corporations -- who stock (and ownership) are traded on a public stock exchange -- most small businesses are (or at least start as) private corporations.

A private corporation is owned by a small group of people who are typically involved in managing the business. Forming a corporation requires developing a legal document called the "Articles of Incorporation" and submitting them to the state in which the corporation wishes to reside.

The advantages of a corporation include limited liability -- an owner (stockholder) can only lose up to the amount s/he invested; unlimited lifespan -- a corporation is charted to last forever unless its articles of incorporation state otherwise; great sources of funding; and ease of transfer of ownership.

Disadvantages include double taxation -- the corporation, as a legal entity, must pay taxes, and then shareholders also pay taxes on any dividends received.

Two other types of ownership include:

S Corporation

A form of ownership that is the best of both partnerships and corporations.

Owners have limited liability, greater credibility (for obtaining financing), and no double taxation as all profits pass directly to the owners and the corporation pays no taxes. There are, however, restrictions on the number and type of shareholders.

Limited Liability Company (LLC)

A form of ownership that is growing in popularity in the United States.

LLCs provides limited liability and are taxed as a partnership or sole proprietorship (depending on the number of members). This type of business formation -- formed by submitting articles of organization to the state in which the company resides -- is growing rapidly because it is flexible, simple to run, and does not require all the paperwork of corporations.

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ownership and structure business plan

How To Write the Management Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

ownership and structure business plan

Ownership Structure

Internal management team, external management resources, human resources, frequently asked questions (faqs).

When developing a business plan , the 'management section' describes your management team, staff, resources, and how your business ownership is structured. This section should not only describe who's on your management team but how each person's skill set will contribute to your bottom line. In this article, we will detail exactly how to compose and best highlight your management team.

Key Takeaways

This section outlines the legal structure of your business. It may only be a single sentence if your business is a sole proprietorship. If your business is a partnership or a corporation, it can be longer. You want to be sure you explain who holds what percentage of ownership in the company.

The internal management section should describe the business management categories relevant to your business, identify who will have responsibility for each category, and then include a short profile highlighting each person's skills.

The primary business categories of sales, marketing , administration, and production usually work for many small businesses. If your business has employees, you will also need a human resources section. You may also find that your company needs additional management categories to fit your unique circumstances.

It's not necessary to have a different person in charge of each category; some key management people often fill more than one role. Identify the key managers in your business and explain what functions and experience each team member will serve. You may wish to present this as an organizational chart in your business plan, although the list format is also appropriate.

Along with this section, you should include the complete resumés of each management team member (including your own). Follow this with an explanation of how each member will be compensated and their benefits package, and describe any profit-sharing plans that may apply.

If there are any contracts that relate directly to your management team members, such as work contracts or non-competition agreements, you should include them in an Appendix to your business plan.

While external management resources are often overlooked when writing a business plan , using these resources effectively can make the difference between the success or failure of your managers. Think of these external resources as your internal management team's backup. They give your business credibility and an additional pool of expertise.

Advisory Board

An Advisory Board can increase consumer and investor confidence, attract talented employees by showing a commitment to company growth and bring a diversity of contributions. If you choose to have an Advisory Board , list all the board members in this section, and include a bio and all relevant specializations. If you choose your board members carefully, the group can compensate for the niche forms of expertise that your internal managers lack.

When selecting your board members, look for people who are genuinely interested in seeing your business do well and have the patience and time to provide sound advice.

Recently retired executives or managers, other successful entrepreneurs, and/or vendors would be good choices for an Advisory Board.

Professional Services

Professional Services should also be highlighted in the external management resources section. Describe all the external professional advisors that your business will use, such as accountants, bankers, lawyers, IT consultants, business consultants, and/or business coaches. These professionals provide a web of advice and support outside your internal management team that can be invaluable in making management decisions and your new business a success .

The last point you should address in the management section of your business plan is your human resources needs. The trick to writing about human resources is to be specific. To simply write, "We'll need more people once we get up and running," isn't sufficient. Follow this list:

After you've listed the points above, describe how you will find the staff your business needs and how you will train them. Your description of staff recruitment should explain whether or not sufficient local labor is available and how you will recruit staff.

When you're writing about staff training, you'll want to include as many specifics as possible. What specific training will your staff undergo? What ongoing training opportunities will you provide your employees?

Even if the plan for your business is to start as a sole proprietorship, you should include a section on potential human resources demands as a way to demonstrate that you've thought about the staffing your business may require as it grows.

Business plans are about the future and the hypothetical challenges and successes that await. It's worth visualizing and documenting the details of your business so that the materials and network around your dream can begin to take shape.

What is the management section of a business plan?

The 'management section' describes your management team, staff, resources, and how your business ownership is structured.

What are the 5 sections of a business plan?

A business plan provides a road map showing your company's goals and how you'll achieve them. The five sections of a business plan are as follows:

SCORE. " Why Small Businesses Should Consider Workers’ Comp Insurance ."

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Introduction to Ownership Structure

It is important to understand what a share ownership structure is so that you can understand the diversity of the businesses around you.

A business does not just vary in size and industry but also in its ownership . This means that some businesses are owned by a single person, group of people, corporations, charitable foundations, or trusts. In fact, some businesses are also owned by the state. Basically, different ownership structure types overlap the different legal forms that a business can take.

It is important to understand what a share ownership structure is so that you can understand the diversity of the businesses around you . Being the owner of a business entity, it is important to understand how the ownership structure of a particular business entity is organized and what that means for the owner’s rights. This article will explain just that for you. Keep reading to know more!

What is an ownership structure?

With a few exceptions, businesses have owners. The nature and the number of owners usually vary a lot for each business. In fact, the owner of a business can be an individual or even another business. To make things more complicated, the rights of an owner to the business can be split between the economic and management rights . The management rights here refers to the ability to influence the appointment of the officers while the economic rights include the rights to receive dividends and profits of the business .

A lot of businesses also own other businesses. To be clear, there are basically three levels of ownership in a share ownership structure. These are parents , affiliates , and subsidiaries . Here, parent companies own the subsidiaries. The amount of ownership interest can range from a fraction to even a complete 100%. Additionally, an affiliate is a sibling legal entity.

This approach to ownership structure includes situations such as publicly-traded firms, closely-held companies, outside investors , and joint ventures. An ownership structure concerns the internal organization of a business entity and the rights and duties of the individual holding the equitable or legal interest in that business.

For instance, a shareholder who is also the owner of a corporation has certain rights. These rights are distinct from the ones of the members of a limited liability company . Additionally, within the corporation, a holder of preferred stock might have different rights as compared to the holder of common stock .

The ownership structure of a single company

When we talk about the ownership structure of a single company, it means that the company does not have any subsidiaries or associates in the picture. It is just one company that has a few shareholders in them. And there are different kinds of shareholders that make up the company, but not everyone has the rights and control over the company. Some have complete control, some of a little control while the others have no control at all.

Total Shareholder Composition

Total Shareholder Composition

As you can see in the diagram, the ownership structure in this company have institutional shareholders with 65.05% of the company ownership , retail shareholders at 13.17% , sovereign wealth funds at 10.47% , foundations (or founder) at 5.20% and others at 6.11% . How you reach the ultimate shareholder structure depends on how the deals fall into place when taking on new investors and if you plan to issue any ownership to employees or other parties.

Ownership Structure of Partnerships and LLCs

LLCs are formed at the state level where there is no involvement of the federal government or the IRS in it. An LLC is formed with the Articles of Organization which is filed with the state. The LLC is not made up of shares and hence has to choose the kind of management structure it would like to use from a member-managed or a manager-managed one. It is the same as a partnership where friends or family can join together to run the business.

All these people are known as the owners in the company and not the shareholder since the LLC is not made of shares . Plus, there are no specific rules on who gets how much (which is usually based on shares for corporations). In LLCs, the agreement between the owners is what helps them understand who gets how much, unlike corporations where payouts from the company are based on share ownership from the shareholders .

What is a shareholder?

A shareholder can be defined as a company or an individual who l egally owns one or more shares in a company . Both private and public companies have shareholders and they make up the company. But it is important to note that the shareholders own the stock in the company and not the corporation itself.

Based on the share class that is given to the shareholders, they get some extra privileges. This includes the right to vote in the election of the board members, the right to the company’s assets during liquidation, the right to buy new shares issued by the company , and the rights to a part in the distribution of the company’s returns .

Shareholders in the primary market who buy IPOs provide capital to corporations. However, the vast majorities of shareholders are in the secondary market and provide no capital directly to the corporation. This means that the shareholders of a public corporation are not – (1) owners of the corporation , (2) the claimants of the profit , or (3) investors, as in the contributors of capital .

Different types of shareholders

From the above, it is clearly understood that there are different types of shareholders that make a company. There are two types: common shareholders and preferred shareholders . Let us talk about each.

#1 Common Shareholders

Common shareholders are the shareholders who own shares from the common stock of the company . Basically, the common stock does not have a fixed value. The owners of the common stock have the last rights to the company assets and profits. Additionally, they may get dividends at the discretion of the company’s board of directors. This means that when the company performs well, the owners get a profit, and when the company suffers losses, the owners do not get anything.

Basically, they have an ownership stake in the company that comes with the following rights:

But that is not all. Common shareholders also have the right to file a class-action lawsuit against the company in case there is an act of wrongdoing that potentially harms the company or negatively affects the value of its common shares. This enables them to exercise considerable control over how the company is managed and how it handles strategies for growth .

Just so you know, there are two kinds of shareholders that can own the common shares. But both do not have the same rights. Each has been explained below:

#2 Preferred Shareholders

Preferred shareholders are the ones who own the preferred shares in the company. These owners have the first claim to the profits and assets of the company. When the dividends are paid out, they get it first and they also get a fixed dividend. After that, whatever is left over, is given out to the common shareholders. These owners do not have any voting rights in the company, which means that they cannot influence the management in decision-making.

All they have is a guaranteed right to be paid a fixed amount of dividends every year and to get the payment before any of the common shareholders get it . The fixed dividend amount is attached to a specific interest rate. For instance, a $10, 5% preference share would pay an annual dividend of 50 cents.

This kind of share is normally offered to investors in the company . There are two kinds of investors:

Ownership Structure of a Corporate Group

A corporate group, unlike a single company, is a group of companies. It is a collection of subsidiary corporations and parent corporations. Their aim is to work together as a single economic entity through a common source of control . The concept of a group is normally used in tax law , company law and accounting to attribute the rights and duties of one member of the group to another or the whole.

Ownership Structure of a Corporate Group

The forming of corporate groups usually involves consolidation via mergers and acquisitions , although the group concept focuses on instances in which the merged and acquired corporate entities remain in existence rather than the instances in which they are dissolved by the parent. The group may be owned by a holding company which may have no actual operations.

So, a corporate group has many sets of shareholders . But not everyone has the rights and control over the complete company group. Some have complete control, some of a little control while the others have no control at all. Unlike a single company, the share ownership structure in a corporate group is very diverse.

There are two kinds of shareholders here; majority shareholder and minority shareholder . Let us understand this better.

Majority Shareholder

Having a large amount of holding of about 50% or more shares in the company puts a shareholder in a stronger position as they can pass special resolutions easily. They are the people who have bought interests in a company which also makes them partial owners of the company. As per company law, there is an important threshold to attain. With a majority of over 50% shareholding, the shareholders are able to pass normal resolutions like:

Along with this, they also have the right to attend annual and general meetings and vote in matters regarding operations . Majority shareholders also have veto power on all decisions. All the rights are usually listed down in the Shareholders agreement deciding who is allowed what rights.

Minority Shareholder

In case a shareholder has a minority shareholding , which is less than 50% of the shares in the company, then the following typical legal rights will apply based on how much percentage of shares they own:

As statutory rights will only afford a minority shareholder with limited protection , a minority shareholder should attempt to supplement their statutory rights with contractual protections in a shareholders’ agreement or in the Articles of Association of the company . Whether this is achievable or not will depend solely on the negotiating power of the minority shareholder. This is to ensure they have a degree of control and that they are in a position to protect their shareholding.

Additionally, a minority shareholder has the right to disagree to:

Also if a minority shareholder who has 15% or more shares in the company feels that the business of the corporation has been carried on with a purpose to deceive any person, or the powers of the directors have been used in a way that is unfairly injurious, oppressive, or that unlawfully disregards the minority shareholder’s interest, the person can apply to the court for a solution.

Subsidiary Companies

A subsidiary is a company that has been acquired or set up by another company which is usually acquired by a public or larger company as a result of its reputation or longevity. The company that opens or acquires the subsidiary company is called a parent company . If a parent corporation exists strictly to hold stocks in other entities, it is called a holding company .

In such a situation, the parent corporation owns more than 50 % of the voting stock of each company acquired. If it holds all (100%) of the voting stock , the small entity is said to be a wholly-owned subsidiary . Parents and their subsidiaries are separate legal entities when it comes to liability issues. But there are situations where both the parent and the subsidiary company file their financial statements as a single unit. Also, ownership of 80 percent or more of a subsidiary’s stock is required for the parent corporation to submit consolidated tax returns.

Associate Companies

In a broader sense, an associate company is a corporation in which a parent company possesses an ownership stake . Normally, the parent company owns only a minority stake of the associate company, as opposed to a subsidiary company. But the actual definition varies a lot based on the jurisdiction and the type of fields. The reason behind this is that the concept of an associate company is used in securities , taxation , accounting , economics , and beyond .

Basically, an associate company can be partly owned by another company or even a group of companies. And as per most accounting rules, the parent company (or companies) don’t consolidate the associate company’s financial statements. Normally, the parent company records the associate company’s value as an asset on its balance sheet.

Consolidated financial statements are the combined financial statements of a parent company and its affiliated companies or subsidiaries. But keep in mind that there are tax rules that must be followed by both companies and vary for each state and country.

How to record your company’s ownership structure or cap table?

Recording your company’s ownership structure means recording the shares and who owns how much of it in one place. There are two ways to do it. Each has been explained below:

#1 Using excel

The oldest way used by many founders to keep track of all the shares in a company was through Excel Spreadsheets . Let us assume there is a company named Best Service Inc. Here is an example of how the cap table was created on the Spreadsheet .

However, this may not be the complete cap table. The reason is that we cannot see the details about the options , warrants , and convertible notes . If the company has any vesting shares or options as well, it may drastically dilute the ownership in your company.

In addition to this, as the company grows, it would become difficult to add all the details . You may be able to add it all up on excel, but the process may be frustrating and time-consuming. You might not be able to show the cap table easily to the other shareholders or investors as you constantly update it. That is why cap table software was created to eliminate any errors and keep your shareholdings up to date.

#2 Using software

As mentioned above, Excel is a powerful and affordable tool. But there are a lot of downsides to using it for a cap table. Fortunately, there is an equity management software that you can take advantage of. The software would reduce the risk of recording an improper transaction and the headache from consistent spreadsheet maintenance.

In addition to this, several cap table management software products offer services that handle all the complicated calculations for you, including the calculation of the fair value of the share-based compensation based on many assumptions like equity value , discount rates , volatility , etc.

Here are the benefits and features of most of the cap table software online:

All in all, the cap table software is the best way to keep track of your share ownership structure and your control in the company as well.

How can Eqvista help track your company’s ownership structure?

Now that you know what share ownership structure is , it is important to learn how to manage it well . Eqvista is an application that can help you do that. It will help you have an organized share structure, which is very important for showing the shareholders of their ownership in the company. You will be able to see the total shares outstanding , the shares issued , purchased , and authorized to owners and investors . In short, the cap table will act as the master ledger to show all the current shareholdings.

Here is the same example of the ownership structure of Best Service Inc on the Eqvista cap table software.

example of ownership structure eqvista

Having an up-to-date cap table helps you in managing all the shareholdings in the company. You will also be able to be compliant with the rules and regulations while dealing with compensation and taxes. Along with this, the investors that review your cap table will recognize the value of your company , and the deal will be made more easily .

With Eqvista , you can easily handle all the shares of your company . In fact, it has all the features mentioned above that a cap table software should have. In addition to that, here are some other benefits that Eqvista offers:

So, using Eqvista , you will not just be able to manage your shares , but also keep an eye on your company’s share ownership structure. Try out our app today !

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Your Business Plan Part 10: Business Ownership Structure

For some, their business plan is only in focus when needed – during times of investment or changing business ownership – but this document should always be by your side to guide you through the evolution of your business no matter where you are in your growth journey. For all types of businesses, it’s essential to be clear on your business ownership structure and understand how this will impact you, your shareholders, and the business.

Your business ownership structure will detail who owns what within your business, and this will be a critical section for future investors or for you to review if you’re in the process of purchasing a business with a company structure where there are multiple shareholders involved.

Business Ownership Structure

Business Ownership Structure

The common types of business structures include sole trader, partnership, and company – one of these will fit your business best. You’ll only need to include an ownership structure section in your business plan if you’re identified as a company or a partnership. If you’re a sole trader, this part is not necessary.

A partnership structure means that two or more people operate the business as a partnership – it’s a simple set-up and often relatively low cost to establish. The key disadvantage to partnership is that it requires all parties to take responsibility for business debts jointly. The actions of your business partner can greatly impact you (and vice versa). A partnership agreement should be included in your business plan, for this reason, detailing how the partnership will function (this is also known as your deed of partnerships).

A company structure is ideal for high-risk businesses (these include bank and merchant account providers, construction and mining, and pharmaceuticals), where your individual shareholders will only be liable for debts or liabilities that your business incurs up to the total unpaid on their shares (and usually this will be zero) – in essence, companies mean limited liability.

As a company, you’re empowered to raise funds and grow when you issue shares, and it’s often the most popular for startup businesses. Within Australia, The Corporations Act regulates companies on home soil, and it’s essential to follow their statutory obligations and Constitution or Replaceable rules.

Most relevant for companies, begin by listing all of your directors (you may also like to include a summary of their professional expertise, but this is not necessary). To complete this, add in any director investments, liabilities and share of profits.

Other Shareholders

In the same way, detail all company shareholders – you may also like to include links to other relevant appendix documents such as your shareholder’s agreement or percentages of ownership – again, this should make it clear to a potential new investor where they might sit if they choose to invest in the company.

Choosing Your Business Entity

Of course, you may be somewhere in between two business structures and looking to make a change. For this, it’s important to consider several factors, first is legal liability. Does your business lend itself to potential liability (like the above-mentioned high-risk businesses), and (if you are currently a sole business owner), can you afford this risk on a personal basis?

If the answer is no, and you’re looking to ensure you can protect personal assets, then a company might be a good option for you.

Also, consider the tax implications of your business entity (you can find more information about Australian business structures by visiting www.business.gov.au ), as well as ongoing administration costs and flexibility options. Finally, reflect on how your business is operating today and where you see yourself within the business in 10 or 15 years – are you planning on still being around as a sole trader or one of a small number of key partners?

Making these decisions takes time, and no two businesses are alike, but it’s best to layout these considerations while you flesh out your business plan, so you have a roadmap of where you plan to be and what form your business structure may take in the future.

Next time, we’ll look at the compliance section of your business plan, which begins the final sections of your document, bringing it all together.

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Presenting the Management and Ownership Section of a Business Plan

business plan concept

Writing a business plan isn't easy; no matter how well you think you have envisioned the workings of the business in your head, getting it down on paper in a clear, complete, and straightforward way can be harder than expected. That's why it's important to understand the purpose of each section of your business plan and what should be included. Here's what you want to include in the Management and Ownership section of a business plan as well as some mistakes to avoid.

What is included in the management and ownership section?

The Management and Ownership section of a business plan features short (one to three paragraphs) biographies of the key personnel involved in forming and running the business. You should include key staff personnel and members of your Board of Directors . Additionally, describe the benefits that each member of the team brings to this business, including pertinent past experience and significant attributes. Also, note his or her key responsibilities in the company.

The organizational structure of the business should be included so that readers will have a clear understanding of how the business will manage day-to-day operations.

Common mistakes made in the management and ownership section

Generally, the Management and Ownership section of a business plan is one of the easier, less time-consuming portions to compile. There is, however, a need to be careful when writing this section to avoid some common mistakes.

Explaining who is behind the company and what each person brings to the table is of great interest to any potential investor .

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By Brett Farmiloe

From seeing a decrease in customer engagement to overall brand confusion, here are nine small business leaders share their best advice to the question, “What is the clearest sign that it's time to rebrand your business."

Reasons why you should rebrand your business

1. your brand is not aligned with your values.

"One sign that it's time to rebrand your business is if your current brand doesn't align with your core values. This can be the case if you've grown and developed as a business but haven't updated your branding to reflect the changes.

"If your current branding doesn't reflect who you are as a company, it's difficult to attract new customers and clients. We recently rebranded our company after realizing that our old branding didn't reflect our core values. We wanted to be sure that our branding reflected the type of company we are, so we could attract the type of clients we wanted to work with. By rebranding, we could communicate our values and attract the clients we wanted to work with." — Matthew Ramirez , Rephrasely

2. Seeing a decrease in both engagement and sales

"If you are seeing a decrease in customer engagement and sales, it is likely time to rebrand your business. If customers are not buying, it means that your current branding is not resonating with them. Rebranding can help you better target your desired customer audience, better communicate your message and values, and ultimately increase customer engagement and sales." — Lilian Chen , Bar None Games

3. You are launching a new product or service

"Rebranding can be a good idea when you are launching a new product or service that doesn't fit with your current branding. This can help to ensure that your new offering is positioned correctly in the market and that it resonates with your target audience.

"For example, if customers primarily know your business for selling a specific product, but you are now launching a new service that is unrelated to your existing product line, it might make sense to rebrand to better align with your new offering. This could involve updating your logo, changing your brand messaging, and revising your marketing materials to better reflect the nature of your new service. Rebranding in this situation can help to clarify to customers and stakeholders that your business is expanding and growing, and can also help to prevent confusion about your offerings." — Mike Stuzzi , MikeStuzzi.com

4. Customer confusion

"If your business's brand is inconsistent, it's time for a makeover. In order to succeed as a business, it's important for companies to have a strong through line connecting all elements of their branding.

"Customers should be able to tell what you sell, your price point, and the quality they can expect just from your branding. If you're finding that your business is stagnating or inconsistent, take a hard look at how you're marketing the company. If customers don't have a coherent understanding of your brand, it's time to make some changes." — Brian Munce , Gestalt Brand Lab

5. Expansion into unfamiliar markets

"When your business expands into new product lines, consumers, or geographical markets, it can cause a major shift in your core. When values or operations no longer align with your brand, it's time to rethink and relaunch. Since you may be reaching new consumers unfamiliar with your brand, you can start fresh and rebrand with a blank slate. It's much easier to build a brand image than erase a customer's impressions of your brand and build it up again." — Maximilian Wühr , Finn

6. Visual elements not portraying your message

"When I first started my online business, I noticed something was missing. My logo didn't reflect the values that I was trying to represent in my brand. It felt dull and uninspired, making it difficult to connect with potential customers emotionally. I knew it was time to rebrand my business. Seeing how my logo wasn't portraying authentic messages, I realized it was crucial to reevaluate how I wanted customers to feel when interacting with my brand.

"That experience taught me that any disconnect between your message and brand story and your existing visuals and design elements means it's time for a change. With a complete rebranding, I could ensure that everything from the colors in my logo to the words we used in social media aligned with my goals." — Mina Elias , Trivium

7. Allowing your ego and surname to get in the way

"I'm a small business owner, and I let my surname be the front-runner of my company. My name is Irwin, so naturally I named my business 'IrwinOrganic.' While this was great for a while, after some time, it became increasingly difficult for customers to understand what services we provided. After all, our specialty wasn't actually anything organic!

"As an SEO specialist, I understood rebranding was necessary in order for us to better communicate our services. Customers have had an easier time understanding our offerings, and this has resulted in increased revenue because of greater customer satisfaction with their experience working with us." — Jamie Irwin , Straight Up Search

8. Having trouble raising prices

"One of the many certainties in business is that your costs to operate it will eventually go up. But if you are struggling to raise the prices for your products, it is a good sign that it is time to rebrand.

"Much of the price points that are placed on a business's offerings are based on the public's perceived value of those products and what they believe is fair value. You can justify price increases by creating a greater sense of value in your business's products through a rebranding that emphasizes quality, showcases efficiency in solving pain points, and fills the gaps missed by competitors. Therefore, if you are having difficulty raising prices without losing customers, you should view this as a red flag and a telltale sign it is time to rebrand." — Alexandre Bocquet , Betterly

9. Current branding is not unique

"If you're finding it hard to differentiate your business from your competition, it's time to rebrand. Your company name and branding shouldn't follow the status quo because customers will struggle to remember who you are and why they should choose you over similar brands. Instead, your branding should showcase what makes you different and better; i.e., your competitive advantage." — Tory Gray , The Gray Dot Company

About the Author

Post by: Brett Farmiloe

Brett Farmiloe is the founder and CEO of Terkel, a Q&A site that converts insights from small business owners into high-quality articles for brands.

Company: Terkel.io Website: www.terkel.io Connect with me on LinkedIn .

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The Complete Guide to Choosing Your Business Structure

choosing a business structure

This article is part of our Business Startup Guide —a curated list of our articles that will get you up and running in no time!

Starting a business is exciting, scary and—let’s be honest—it can be confusing.

You don’t need an MBA or formal business training to start and grow a very successful business, but there are some important choices you’ll need to make right from the beginning, starting with choosing your business structure or entity.

What are the most common business structures or entities?

The most common business structures are sole proprietorship, partnership, limited liability company (LLC), and a few different types of corporations —the standard corporation (often called a C corporation or “C corp”), the small business corporation (often called an S corporation or “S corp”), and the benefit corporation (often called a B corporation or “B corp”).

Why does your choice of business structure matter?

The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your personal savings), and even your ability to raise money from angel investors or venture capitalists.

So, the structure you choose is very important.

This guide will explain the basics of common business structures, but we can’t tell you exactly which structure you should choose—if you need that kind of advice, you should consult a lawyer or an accountant.

SOLE PROPRIETORSHIP (1)

Sole proprietorship

The simplest business structure is the sole proprietorship. Your business is a sole proprietorship if you don’t create a separate legal entity for it. This is true whether you operate it in your own name, or under a trade name.

The main advantage of the sole proprietorship is that it’s fairly simple and inexpensive. The disadvantage is that it doesn’t create a legal separation between you and your personal assets and your business assets. If you’re sued or your business folds, your personal assets are fair game for creditors and in terms of legal liability.

Who is a sole proprietorship for?

If you are planning on being self-employed and running your small business by yourself, a sole proprietorship may be for you.

For example, a personal trainer who is planning on offering one-on-one coaching for clients would be a great candidate for a sole proprietorship. So too would an artist who creates beautiful one-of-a-kind jewelry to sell on Etsy.

How do you form a sole proprietorship?

A sole proprietorship is also the easiest business to form; no official registration action is required on your part.

So, you’re already selling your unique jewelry on Etsy? Congratulations—you’re a sole proprietor.

However, there will still likely be licensing, permits, and regulatory hoops to jump through, depending on your industry. You’ll want to check with your local secretary of state’s office website.

Additionally, if you’re planning on doing business under a name that isn’t your own, you’ll need to file for a DBA, or “doing business as.”

I cover how to get a DBA in this article here , as well as other details on how to register your business name, so check that out before you get started.

Get your free business plan quote today!

What should you be aware of?

A sole proprietorship is fairly straightforward to form, but here are some considerations:

Further sole proprietorship reading:

PARTNERSHIP (1)

Partnership

So, let’s go back to that example of the personal trainer, who could start a sole proprietorship business and offer client coaching.

But, maybe she wants to pair up with a nutritionist, and the two of them plan on building a fitness empire together. Both entrepreneurs share ownership and have shared input and participation in the company.

Now you no longer have a sole proprietorship—you have a partnership.

Still a fairly simple business structure, a partnership involves two or more individuals sharing ownership of their new business. They’ll both contribute to the business in some way, and share in both profits and losses.

Partnerships are harder to describe because they change so much. They are governed by state laws, but a Uniform Partnership Act has become the law in most states. That act, however, mostly sets the specific partnership agreement as the real legal core of the partnership, so the legal details can vary widely. Usually, the income or loss from partnerships passes through to the partners, without any partnership tax . The agreements can define different levels of risk, which is why you’ll read about some partnerships that have general partners and limited partners, with different levels of risk for each. Your partnership agreement should clearly define what happens if a partner withdraws, buy and sell arrangements for partners, and liquidation arrangements if that becomes necessary. If you think a partnership might work for your business, make sure you do it right. Find an attorney with experience in partnerships, and ask them to give you references from present and past clients. This is a complicated area and a mistake in your partnership agreement will cause a lot of problems.

Who is a partnership for?

Think of a partnership as a slightly expanded version of a sole proprietorship. It’s similarly easy to form, and best for two or more people who want to formally agree to be business partners, and start a business together.

So, that personal trainer and nutritionist pairing? A perfect partnership, as they both bring something to the table and are equal participants in the business. So too would be a pair of entrepreneurs launching an online consulting business, two master brewers starting a local brewery, and so on—you get the idea. If you’re thinking of starting a business partnership with your spouse, read more about that here .

Types of partnerships

Before we get into how to form a partnership, let’s take a look at the different partnership options. There aren’t many, but the type of partnership you choose will depend upon how long you plan to be partners, and how active a role all involved parties will take in your new business.

General partnership: A general partnership assumes that all parties are equally involved; that is to say, all profits, liabilities, and duties within the company are distributed evenly. If there is an intentionally unequal split in the partnership (for instance, if one partner opts to accept a greater portion of work in exchange for a greater profit share), this must be noted on the official partnership agreement.

Limited partnership: A limited partnership (also known as a partnership with limited liability) is often used for partners who serve an investor role only, and have limited input into the actual running of the company. It’s a significantly more complex structure, and less frequently used.

Joint venture: If you plan on partnering up for one specific project, a joint venture might for you . Joint ventures function the same as a general partnership, but for a confined span of time, such as the completion of a one-time project.

How do you form a partnership?

Similar to a sole proprietorship, simply doing business together effectively forms your partnership. However, if you plan on doing business under a name other than that of yourself and your partner, you’ll need to file a DBA .

You may also need to apply for certain licenses and permits , depending on your business and your state.

Here are a few things to keep in mind before launching your partnership.

Further partnership reading:

Limited Liability Corporation (LLC)

Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating?

It’s understandable—plenty of would-be entrepreneurs shudder at the thought of the bank seizing their personal assets should the business go south.

A limited liability corporation (or LLC) is, in some ways, the best of both worlds. It allows for the flexibility of a partnership or sole proprietorship, but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation, and offers a combination of some limitation on legal liability and some favorable tax treatment for profits and transfer of assets.

This is a newer form of legal entity, and be aware that LLCs vary a lot state to state, so the advisability and benefits of forming one will also vary. It’s a good idea to talk to a local attorney if you’re interested in setting up an LLC.

Who is a limited liability corporation for?

If the idea of taking on complete personal liability for your business makes you hesitant to start one, you might want to consider a limited liability corporation.

If you have substantial personal assets that you wish to protect and not involve in your business, an LLC might be right for you. On the same note, if you’re in an industry where lawsuits are common, having an LLC as your business structure can potentially protect your personal assets.

How do you form a limited liability corporation?

The process of forming an LLC is slightly more complex than a sole proprietorship or a partnership; you’ll have to choose a compliant business name, file your articles of organization, and create an operating agreement, in addition to any industry-specific licenses or permits and a DBA, should you choose to use one.

Check out our articles on forming an LLC at the end of this section for more information.

While there are clear advantages to forming an LLC, it’s a more complex business structure than a sole proprietorship or a partnership, and you should determine first whether or not an LLC is right for you.

Further LLC reading:

CORPORATION (1)

Corporation (S corp, C corp, B corp)

When most people think of a business structure, a corporation is likely what jumps to mind first.

Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States.

Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made. You’ll almost always want to have your CPA, and in some cases, your attorney, guide you through the legal requirements for switching.

Keep reading to learn more about the different corporation types, and which kind of business is best suited to each type.

Who is a corporation for?

A corporation is the most complex business structure; so, if you’re starting a very small business and are working either by yourself or with just a few others (like a partner or a few employees), then a corporation might not be for you.

This business structure is recommended for companies that are larger and more established, have many employees, intend to sell stock in their company, will be scaling quickly, have many outside investors, or some combination of these traits.

How do you form a corporation?

To form a corporation, you’ll have to have registered your business name . You’ll also need to file your articles of incorporation , as well as get a Federal Tax Identification number (also known as an employer identification number or EIN).

For more detailed information on how to form a corporation, see our “further reading” at the end of this section.

The different types of corporations: C corp, S corp, and B corp

While the most common type of corporation is technically known as a “C corporation,” or “C corp,” there are a few other types of corporate structures you should be aware of.

Here’s a breakdown of the different types:

C corporation: What we typically think of when we refer to corporations. With a C corp, all shareholders combine funds and are then given stock in the newly formed business. A C corp is a completely separate tax entity in the eyes of the IRS, meaning that your business can take tax deductions. It also means that earnings can be taxed twice, both as they stand in relation to your business and on your personal taxes, if you take income in the form of dividends. However, good tax planning can often minimize the impact of double taxation.

Most lawyers would agree (but verify this with your own lawyer who is familiar with your unique business) that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

S corporation: An S corp is similar to a traditional C corporation, with one major difference: Profits and losses can be “passed through” to your personal tax return.

The S corporation is used for family companies and smaller ownership groups. The biggest difference between a C corp and an S corp is that the S corporation’s profits or losses go straight through to the S corporation’s owners, without being taxed separately first. In practical terms, this means that the owners can take their profits home without first paying the corporation’s separate tax on profits, so those profits are taxed once for the S owner, and twice for the C owner.

That being said, the C corporation doesn’t send its profits home to its owners as much as the S corporation does, because it usually has different goals and objectives. It often wants to grow and go public, or it already is public. In most states, an S corporation is owned by a limited number of private owners (25 is a common maximum), and only individuals (not corporations) can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state, and then request S corp status. The IRS instructions for Form 2553 (which is what you’ll need to file to become an S corp) can help you determine if you qualify. You can also request S corp status for your LLC, however, it’s advisable to speak with an attorney before beginning this process.

B corporation: Does your company have a dedicated social mission, a good cause built into its foundation that you’d like to continue furthering as your company grows? If so, you might want to consider becoming a B corporation , which stands for “benefit corporation.” However, the name is a bit misleading; a B corp isn’t an entirely different structure than a regular C corporation. It’s merely a C corp that has been vetted and approved for B corp status. Some states give tax breaks to B corps, and it’s a great way to stand behind a cause.

So, why would you choose a B corp over a nonprofit? The biggest difference is in terms of ownership —with a nonprofit, there are no owners or shareholders; however, with B corp, which is still a type of corporation, there are still shareholders who actually own the company. So, a B corp has a social mission, but is still a for-profit company (as opposed to a nonprofit), and still has an end goal of returning profits to the shareholders.

While there are advantages to forming a corporation, it’s certainly not for everyone, as corporations are the most difficult types of businesses to form. Here are some things to keep in mind:

Further corporation reading:

On the opposite end of the business structure spectrum, you’ll find nonprofits.

They differ greatly from the previous business structures, for one obvious reason: they’re a “not for profit” business structure, meaning they do not exist to generate revenue for shareholders, but rather funnel business revenue into a social mission, cause, or purpose.

Who is a nonprofit for?

A nonprofit business is great for those whose businesses mission is charitable, educational, scientific, religious, literary—essentially, businesses that qualify for tax-exempt status.

This can include organizations that provide shelters for the homeless, conservation groups, performing arts centers and museums, various education centers, and more.

How do you form a nonprofit?

Forming a nonprofit is similar to forming a corporation; you’ll need to file your articles of incorporation, as well as file for tax-exempt status with both your state and federal government .

What’s the difference between a nonprofit and a cooperative?

Similar to a nonprofit, a cooperative is a business with a social mission that doesn’t divide income between shareholders, but rather toward a cause or purpose. However, while some states view nonprofits and cooperatives as the same, a cooperative differs in the sense that it is owned by the members, referred to as “user-owners.”

If you plan on organizing your business so that it is democratically owned, it might be a good idea to look into the cooperative business structure .

Starting a nonprofit can be deeply rewarding, but as they’re similar in structure to a corporation, they’re not a walk in the park to form.

Further nonprofit reading:

Not sure? Ask your attorney

Tim Berry, founder of Palo Alto Software (maker of Bplans) reminds small business and startup founders that choosing a business entity or structure is something to take seriously. He says:

“Make sure you know which legal steps you must take to be in business. I’m not an attorney, and I don’t give legal advice. I do strongly recommend working with an attorney to go through the details of your company’s legal establishment and licensing.

By including information on common types of business structures here on Bplans, I don’t mean to imply you should do it yourself.

The trade-offs involved in incorporation versus partnership versus other forms of business are significant. Small problems developed at the early stages of a new business can become horrendous problems later on. The cost of simple legal advice in this regard is almost always worth it. Starting a company should not involve a major legal bill except in special cases. Don’t skimp on legal costs.”

If you’re looking for more information on additional permits and licenses your new business will need, check out this guide to help you get started.

Briana Morgaine

Briana is a content and digital marketing specialist, editor, and writer. She enjoys discussing business, marketing, and social media, and is a big fan of the Oxford comma. Bri is a resident of Portland, Oregon, and she can be found, infrequently, on Twitter.

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