Different Business Entities: Pros and Cons

If you are considering starting up your own business, there are several things that you should consider. Each business entity has its own characteristics and requirements. Take a few moments to review the pros and cons of each of the major business forms.

Sole Proprietorship

A sole proprietorship consists of one individual who owns and controls the entire business.

Pros:

•The proprietor handles all aspects of managing the business.

Cons:

•If the proprietor is away and no one has authority over the business, the business may suffer for lack of management.

•If an individual is appointed with authority while the proprietor is away, the individual will be running the company without a vested interest, which could lead to mismanagement.

Limited Liability Company

A limited liability company (LLC) is usually owned by a few different people but can be owned by one individual. The members of the company can either run the company themselves or appoint a manager or management team to run the business.

Pros:

•The owners and managers have a direct relationship.

•The owners can determine and institute the best management structure to fit the needs of the company.

•In the case that a sole individual creates an LLC, it takes responsibility off of them and puts it on the company. So, should the business be sued, the entity that is suing cannot pursue them personally.

Cons:

•Depending upon the structuring of the business, each member of the company has weight in the decision-making process. This can lead to disagreements and deadlocked decisions.

General Partnership

In a general partnership, each partner has a say in the management of said partnership. In a standard agreement each partner has equal rights; however, an agreement can be structured for certain partners to have a higher or lower stake in the business.

Pros:

•An agreement may be structured to where a partner with expertise in an area may be designated as the decision-maker for that particular area, while important decisions are still made by all of the partners.

Cons:

•If a partner institutes a contract all of the partners are bound by it and any liabilities that are incurred.

•Since each partner has a say in the decision-making for the business, there are opportunities for disagreements and deadlocked decisions.

Limited Partnership

A limited partnership is broken down into general and limited partners. There is at least one general partner who manages the company.

Pros:

•Depending upon the breakdown of the limited partnership agreement, a general partner’s management decisions are subject to approval by the limited partners.

Cons:

•If a limited partner participates in the management of a business, he runs the risk of becoming personally liable for the obligations and debts of the partnership.

•Due to the limited nature of the partnership, an individual may be weary of becoming a limited partner. In such cases, it may be difficult for the partnership to raise funds.

Corporation

A corporation is owned by shareholders and managed by directors and officers.

Pros:

•Corporations are usually managed by highly skilled individuals.

•A Board of Directors is elected, and these individuals manage the corporation. The officers implement the decisions of the board and run the daily operations of the company.

•Shareholders may or may not work in the corporation, and they receive dividends from the corporation either way.

Cons:

•In order for a shareholder to have a role in management, he must also be an officer or director. Therefore, individuals who are strictly shareholders may find it difficult to have an impact on the trajectory of the corporation.

As you can see, each entity has its own pros and cons. Consider these things closely when choosing both your type of business and your position in it.

Legal Disclaimer

The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.