Online Business Ownership: Which type is for you?
Owning your own business can be one of the most liberating and satisfying accomplishments you’ll ever follow through with. It can also be one of the most stressful and frustrating experiences if you don’t spend some time authoring a business plan that works for you and your future business plans.
The first step in any business plan is to consider and select the best business ownership type for you or your team.
The two most common types of business ownerships are sole proprietorships and general partnerships.
A sole proprietorship type of ownership has one person that owns the entire business. In most jurisdictions, the sole proprietor simply reports their earnings or losses via their personal income tax filings.
Sole proprietorship is ideal for someone who prefers that everything flows through them, and that all decisions, debts, and assets are owned only by them.
A general partnership is a business ownership type that allows two or more people to form a legal business entity where all partners are responsible for decisions, debts, and assets. In this ownership type, all partners are held accountable for other partners’ decisions.
For this type of ownership to work, it is highly advisable to form operating agreements and contracts with your partners to explicitly state who does what, who contributes what, the organizational structure, and how decisions will be made.
The two remaining business ownership types include a limited liability corporation, and an S corporation.
A limited liability corporation (LLC) is a type of incorporation that shifts liabilities and resources from individual partners onto the LLC itself. Ultimately, it protects the partner(s) from undue hardships that may result from the business itself; whether that be lawsuits, copyright infringements, or otherwise.
An S corporation has similar characteristics to the LLC, but can instead be extremely burdensome for the average entrepreneur. S corporations are required to setup a board of directors, be in compliance of many regulatory issues and filings, and hold general meetings as required.
When considering a new online business ownership type, it would be advisable to avoid the S corporation type.
For most new online entrepreneurs, a sole proprietorship or an LLC (if you have partners) is the best route to go. The sole proprietor has the freedom to build and grow the business as they see fit. They have complete discretion on all matters of the business, and this can be the best part of business ownership.
If you’re starting a business with partners however, the LLC will be your ideal ownership type. It will allow you and your partners to setup contracts and arrangements for operational issues.
These issues can include ownership percentages, how you will settle disputes between partners, how and when you and your partners will realize income and debt, and other business strategy issues.
The LLC will give you the same benefits of a corporation without forcing you to devote time to all the administrative tasks that come along with the S corporation type.
As an entrepreneur, time is your most valuable resource. Being agile is important for many new online businesses, and the sole proprietorship and LLC business types allow you to maximize your time with building the business instead of other mundane administrative tasks.
It is important to note that many countries outside of the US do not have an LLC business type. If you are outside the US, please consult appropriate legal advice on your business types and the pros and cons of each.