Question

In your own works, please explain the primary types of business entities. Be sure to include the principal characteristics and ownership characteristics of each business entity. What are the pro and cons of each type of entity?

Why do different types of business entities allow for unique ownership structures? Do you believe ownership structure an important factor for business owners when selecting a business entity?

Answer 1

For any business to happen, there has to be a coming together of at least one person who would put in money to begin it. And the person would also expect some return out of the money put in. This dynamics offers more than one possible structure that can be given to any business in terms of control. Following are the primary types of such structures or entities:

1. Sole proprietorship:
   A single person handles the entire business and bears all the profits and losses of the business. It is not registered under any law governing the state/country.
   
   Pro: The business does not need to file any periodic financial statement to the government or others exposing its balance sheet, or other details.
   Con: In case of any debt taken, wherein a sole proprietorship can not repay it using the assets of the business, the personal assets of the owner can be used for the repayment (also known as 'unlimited liability').
   

2. Partnership:
   2.1. General Partnership: A general partnership is an agreement between two or more persons who join together to carry on a business venture for profit. In India it is governed by Indian Partnership Act 1932. It need not be registered under the Partnership Act, however, to avail any legal recourse, a partnership would have to be a registered entity under Partnership Act.
   
   Pro: The liability is shared among more than one person, thus reducing the risk. There is a distribution of workload as well. There is no need to file any periodic financial statement to the government or others exposing the business' balance sheet, etc.
   
   Con: Unlimited liability; Difficulty in restructuring the control and profit/loss sharing if one or more partners quit.
   
   
   2.2 Limited Liability Partnership (LLP): An LLP is structured similar to a general partnership except that here the liability is limited to the assets of the business.
   
   Pro: There is a distribution of workload. There is no need to file any periodic financial statement to the government or others exposing the business' balance sheet, etc. The liability is limited to the assets of the business.
   
   Con: Difficulty in restructuring the control and profit/loss sharing if one or more partners quit
   

3. Corporation/Company: These entities are registered under the respective Companies Act of a state/country. In India, they are registered under the Companies Act, 2013.
   
   3.1 Private Ltd. Company: There are a number of shareholders (restricted by laws of individual countries) holding shares of the company. Liability is limited to the amount of share each shareholder holds.
   
   Pro: Limited liability; risk distributed among many shareholders
   
   Con: Relatively tougher to sell out one's stake due to unavailability of a ready market; Need to file financial statements to government periodically
   
   3.2 Public Ltd. Company: There are many number of shareholders (without restriction on number) holding shares of the company. Liability is limited to the amount of share each shareholder holds. The shares/stocks are publicly traded on stock exchanges.
   
   Pro: Limited liability; risk distributed among many shareholders; easy entry and exit due to readily available public market for buying/selling of stocks
   
   Con: Need to file financial statements to government periodically; Financials get open in public and so public has access to the information about the direction and possible strategies of the company