Which Form Is Best? Different Forms of Business Ownership

Introduction

Watoma and Katrina Kinsey, mother and daughter, are in the process of launching a business that specializes in upscale children’s birthday parties. They have leased a large building, renovated it, and purchased equipment and supplies to be used for the parties. They forecast that the business is going to start off slowly but will be profiting upwards of $50,000 within five years. The Kinsey’s have agreed to split the profits, debts, and responsibilities equally as both of them will be equal owners. As part of their long-term plans, they wish to franchise their company. The problem there are faced with today is what form of business ownership would be best?

Sole Proprietorship

One form of business ownership that the Kinsey’s must take into consideration is the sole proprietorship. This is the simplest and most popular form of business ownership. A sole proprietorship is an unincorporated business owned by only one person. In a sole proprietorship, there is no legal distinction between the owner and the business. Therefore, the legal liabilities, taxes, debts, profits, etc. of the business also belong to the owner.

There are many advantages to a sole proprietorship business, as demonstrated by the high popularity of this ownership type. However, a sole proprietorship also has disadvantages and may not be the right fir in the case of some companies.

Advantages

Sole proprietorships are simple and quick to create. All the Kinsey’s would need to do to legally become a business is obtain the necessary licences from their local government. Once this is done, the business can begin operations, which means they can quickly start creating revenue. In addition to being simple to create, sole proprietorships are also the least costly form of business ownership to begin. There is no need to create and file documentation when starting a sole proprietorship. Even once the business has started, there are very few government regulations they need to meet. In fact, the sole proprietorship is the least regulated form of business ownership.

Because there is no distinction between the owner and the business, for sole proprietorships, the owner directly receives all the profits from the business and less taxes. This is known as the profit incentive and is a major advantage for the sole proprietorship. This differs from other forms of business ownership where profits would have to be shared with partners and/or shareholders.

Also in a sole proprietorship business, the owner is in complete control of the business’ operations and has the authority to make important decisions and steer the company in the direction they feel is necessary. This can all be done without having to consult with anyone else.

Sole proprietorships are also very easy to discontinue operations. If the