Business is also classified according to ownership, and deciding the type of ownership is one of the most important business decisions. The ownership decisions have long lasting decisions on the future of the business so it is important that this decision is to be taken after consulting with a lawyer or chartered accountant.
Factors like nature of the business, vision, the mission of the business, levels of the business, nature of operations, geographic and political factors etc. have to be taken into consideration before proceeding with ownership decisions of the business from different types of Business Ownership.
Following are a few types of Business Ownership :
1) Sole Proprietorship :
Almost every business start as Sole Proprietorship owing to the convenience of business transactions and the relatively small nature of the business. The ownership of the firm lies with a single person, usually who is the whole and sole of the business decision making authority. The proprietors are the ones who usually own the assets of the business and profits generated by them entirely.
The downside of it is they also have to take responsibilities of liabilities and debts if any. In the eyes of the public, the proprietor and business are one. The advantage of these types of business ownership is that the businesses are easy to set up under one authority.
The proprietors are in complete control of all the decision-making process which makes it easier for public and other stakeholders while dealing with the company. The owners of sole proprietorship receive all the profits of the business which they can reinvest or retain for own use. In the case of the worst-case scenario, the business is easy to liquidate since the authority lies with a single person and reduces multiple decision makings thereby reducing time.
2) General Partnerships :
Unlike Sole proprietorship, general partnerships involve two or more people as owners of the business. These people are termed as business partners and a legal agreement is made between the partners regarding the legalities of the business including the business aspects, profit division, work and duty division including way out if either or both partners would want to end the partnership and the settlements after that.
It is a well-known fact that every partnership ends at some point in time or at the time of crisis if well-outlined processes are not defined. This is classified as one of the successful types of business ownership if everything works out well.
The advantages of General partnership are they are relatively easy to initiate except for the fact that a lot of time has to be invested in developing a partnership agreement. Since all the owners contribute funds for the business, the capital for the business increases substantially. Since diverse people are involved in ownership, it utilizes their talent and skills set to develop various aspects of the business.
There are two types of partners which can be present in Partnership business :
- Active Partner – one who takes an active part in the business management
- Sleeping Partner – who takes little or no part in business activities
3) Limited Partnership –
Limited partnership business ownership involves a combination of the above types of sole proprietorship and General Partnership. There are multiple people listed as owners in limited partnership but the business decision making authority lies with either one or few of the partners and rest all only contribute the funds and share the profits.
These are called limited partners and they have liability to the funds invested by them. A limited partnership is relatively easy to form and people with available finances and investors who know nothing about business can invest in it since they will be concerned only with sharing the profits of the business.
This ensures that there is less interference of other partners in the day to day activities of the business and this itself is the disadvantage of the limited partnership types of business that even though the investors invest money, he would have no say in the management activities.
4) Joint Stock Company –
Coming together of a group of individuals, for the purpose of sharing profits by supplying the capital required to start the business in the form of shares is called Joint Stock Company. Joint Stock types of business overcome most of the disadvantages of partnership types of business. Usually, these types of business consist of more than 20 people.
The company is registered by giving it an appropriate name, outlining its vision and mission and registering it with the Registrar of Companies. The shareholders then elect a board of directors who are responsible for making policies, taking decisions and are imbibed with running of the company efficiently. There are two types of Joint Stock companies:
a) Private Limited Company :
A Private Limited is very common among all types of companies. The capital for a business is collected from business partners who may be active or sleeping. The Pvt. Ltd. company does not allow sharing or transfer of stocks and restricts public from taking up of shares.
There is no need for filing a consent of directors in a Pvt. Ltd. company and it does not need a certificate from the registrar of companies for initiation of business and neither is it required to share Balance sheet or Profit and loss statements or hold an annual general meeting like a public limited company.
The only thing a Pvt Ltd company has to do is send a certificate along with returns saying that it does not have more than 50 shareholders. This report is to be sent to the registrar of the companies. The Pvt ltd company resembles any partnership types of business with the advantage of raising large capital investment.
b) Public Limited Company :
In this type of business, the capital is collected from the public in the form of small amounts of shares having low face value. The requirement is to have a minimum of 7 Shareholders while having no capping on a maximum number of shareholders. Unlike Pvt. Ltd. company, Public Ltd company has to register with the registrar of the companies, have a board of directors for approvals, generate and share balance sheets, profit, and loss statements and conduct Annual general meetings.
Public limited types of companies do not have a limit on the transfer of shares but they have to get their accounts audited every year. The biggest challenge in public limited company is to get investors or shareholders and its formalities in initiating of its business. Also owing to the large sum involved, there is a very high possibility of frauds within the organization.
5) Cooperative Societies :
Cooperative societies are private ownership which is an amalgamation of large partnerships as well as features of a corporation. The members of cooperative societies pay for buying shares and the profits are then distributed amongst its members. Each member in Cooperative societies has only one vote which prevents the concentration of power in few hands.
Just like Public limited company, cooperative society has a board of directors and conduct periodic meetings of shareholders. The principle behind the formation of cooperative societies is to form cooperation and self-help and to obtain necessities of everyday life at subsidized costs. The advantages of cooperative enterprises are that it is a democratic form of ownership and overheads are lowered as the members of cooperative may provide honorary services and the common man is benefited by cooperative societies.
6) Public Sectors :
Public sectors come under the types of business ownership which are entirely owned and managed by the state. They are also companies that are either owned or managed by the state. These types of business ownership are either fully or partially in the hands of the government and they are the ones who supply goods and services to society.
The ultimate control of the public sector remains with the state and it prevents unbalanced growth of industries bringing a regulation. Capital is not an issue with the public sector and expansion of business posses no problem owing to government involvement. Public sectors are accountable to the State legislature and parliament about their results.
It is a well-known fact that compared to private businesses, public sectors are not efficient. The public sector is perfect for those industries which require heavy funding and are difficult to manage under the private sector and the availability of capital and raw material is made available easily for them.
The disadvantages of the public sector include inefficiency compared to their private counterparts and they usually run in losses due to improper management. Also, there is too much interference from the government in the internal affairs of the company at management levels.
7) Private Sector companies :
It is exactly opposite to that of public sector companies are entirely non-governmental organizations. Private sectors do not undertake businesses where profit margins are low or where the business is risky. They are more often than not, run by businessmen from various sector who have an in-depth knowledge of running the business.
The profit possibility is very high along with the efficiency while wastage of resources is minimized. The decisions and the approvals, if any, are provided quickly compared to the public sector companies. Another advantage of the Private sector is there is no interference from the Government or politicians in day-to-day business decisions.
However, the disadvantages of private sector include overexploitation of workers by the companies and often starting of private sector companies requires huge capital investment, bringing which is very challenging. These types of business owners also lead to the accumulation of profits in selected few hands.
8) Limited Liability Partnership :
Although it is a form of partnership, it is classified separately in types of business ownership owing to its popularity and recent interest of many upcoming companies in forming the same. Abbreviated as LLP, these companies are for a limited time on a contractual basis.
Usually, two partners are involved in limited liability partnership one of which is an investor and other provides brand name and products but the later does not have any contractual obligations towards liabilities and only first partner would be responsible for liability. This kind of business structure is used by most of the lawyers and accountants, along with few businesses.
The above were all the Types of Business Ownerships commonly found in a business company. Hope the article helped you define the types of business ownerships and classify them and chose the right kind that you want.