Starting a business is a chance to offer a new product or get involved with a growing industry. But the process of starting up is seldom as exciting as the owners' reasons for doing so. One of the most important decisions involved in starting a business is what type of ownership structure to use: a sole proprietorship, a partnership or corporate ownership.
Each type of business ownership has its own terms. A sole proprietorship consists of a single individual who owns the company and serves as its only employee. A partnership is similar in its simplicity, but it can involve two or more owners. Corporate ownership, on the other hand, can involve any number of owners but it turns the business into a corporation, which is a distinct legal entity. The business gets a name and takes on many of the rights and responsibilities that private individuals enjoy.
Corporate ownership differs from other types of business ownership in several key ways. While other types of businesses disappear when the owner or owners die, a corporate ownership structure allows the business to last indefinitely. Corporate ownership also protects owners' liability; if someone files a lawsuit against the business, the owners aren't personally responsible and their personal assets are protected. Corporate ownership allows a business to set itself up for selling stock in the future through an IPO, or initial public offering.
There are several types of corporations, each with its own features besides a corporate ownership structure. A general corporation is the most basic type, protecting owners from liability. S corporations are another option; they may only have up to 75 owners (known as shareholders) and enjoy special tax status from the federal government. LLCs, or limited liability companies, face even fewer tax restrictions and give owners more options in terms of management and oversight. A corporation's founders must choose an ownership structure when they incorporate the business in a given state. State tax codes and stock exchanges treat each type of corporation differently, so the decision is an important one.
Not all businesses that use a corporate ownership structure are publicly owned. Instead, a public company is one that sells ownership shares on the open market through a stock exchange. In these cases, the corporate ownership includes everyone who owns stock in the company. Each stockholder enjoys the liability protection of the ownership structure and investors can become owners without risking more than what they pay for their shares. Some corporations never go public, instead using corporate ownership to protect a smaller group of owners who maintain control over the business.