In the world of commerce, businesses are of all shapes and sizes. The difference in the type of work you pursue can also affect everything from your company structure to your daily operations. By understanding these 11 types of businesses, entrepreneurs can make better decisions about the types of businesses they want to start and consumers can better understand the variety of businesses out there. Here is an overview of the different business types and their features:
1. Sole Proprietorship
A sole proprietorship is one of the easiest and most common types of business. As their name implies, this is one individual that owns and runs a business. Commonly used by freelancers and small business owners since it is easy to form and simple.
Key Characteristics:
- Owned by one person
- The decision-making is entirely in hands of the owner
- Profits and losses go straight to the owner
- Few requirements by regulators
The primary disadvantage, however, is the sole proprietorship leaves the owner with unlimited liability, so liabilities from the business can claim personal assets.
2. Partnership
A partnership is a type of business organization in which two or more people share ownership of a business. Partners negotiate their shares of profits, losses and liabilities. Based on the degree of control and liability each partner has, partnerships can be general or limited.
Key Characteristics:
- Owned by two or more people
- Liability and profit are shared
- Flexible management structure
- More informal than a corporation, generally
However, partnerships are relatively easy to form, one potential downside is that partners are also personally liable for the business debts, unless a limited partnership structure is used.
3. Corporation
Corporations, the more complicated form of business organization, meaning the business is a separate legal entity from its owners (called shareholders). Owners have limited liability, and the corporation can buy property, sign contracts, and incur debt separate from its shareholders.
Key Characteristics:
- Legally separate from its owners
- Limited Liability of Shareholders
- May issue stock to raise capital
- Increased regulation and formalities
Corporations may be privately or publicly held. Corporations offer maximum protection to their owners, but require complexity, greater setup, and operating costs.
4. Limited Liability Company (LLC)
Broadly, an LLC is a hybrid of partnerships and corporations. An LLC is similar to a corporation in that owners (members) have limited liability, but LLCs allow for flexible management and less formalities, making it an appealing choice for medium sized and smaller corporations.
Key Characteristics:
- Limited liability for members
- Flexible management structure
- Less strict formality than a corporation
- Profits not taxed at the corporate level (pass-through taxation)
LLCs have many of the benefits of corporations, limited liability (that is you can’t lose more than you invested in the business) but lack some of the complexity and double taxation (getting taxed at the corporate level and then again when you take the profit out).
5. Cooperative (Co-op)
Cooperative (co-op) – A business owned and operated by a group of people to benefit the group. Cooperatives are unlike most other forms of business structures in that they are designed explicitly to meet the specific needs of their member,” b. be they customers, employees, or producers.
Key Characteristics:
- Member owned and controlled
- Profits are shared among members according to their involvement
- Widespread in sectors ranging from agriculture and retail to housing
Co-ops are about serving their members rather than maximizing profits to pay outside shareholders. They are most commonly found in industries where collective ownership of resources is advantageous.
6. Franchise
Franchising is a unique business approach in which a company (known as the franchisor) sells the rights to its business model, branding, and products to individuals (known as franchisees). Franchises provide individuals with an opportunity to open a business with an already established brand and support system.
Key Characteristics:
- As the by now established brand
- Franchisee often pays fees or royalties to the franchisor
- Benefit from the marketing and operational systems of the franchisor
- Restrictions on their independence compared to other business models
To entrepreneurs, franchises tend to be a low-risk option because you already have a system that works. But franchisees must follow a strict set of rules and pay royalties to the franchisor.
7. Nonprofit Organization
Unlike businesses, which are typically established to make a profit for their owners or shareholders, nonprofit organizations exist to help further a social cause or provide a public benefit. Such organizations may function across several sectors, educational, healthcare, environment, etc.
Key Characteristics:
- Works for the benefit of a public or social good
- Must reinvest profits into the organization
- Qualified for tax-free designation
- Board of directors governed
Nonprofits get their funding from donations, grants, and volunteers. Nonprofits, despite their nonaverse nature, can be massive organizations that wield meaningful influence on society and have large budgets.
Conclusion
It is important to understand the various types of businesses, whether you are an entrepreneur who is about to start a company, or someone who wants to know more about the different types of organizations in the market. Each type has its own benefits, challenges, and ideal use cases based on the goals and needs of the owner. Whether setting up a small sole proprietorship, developing a complex structure or forming a cooperative these differences can help inform your business decisions and influence your business’s success.
