The Most Common Business Organization Forms: Factual Data, Numerical Insights, Benefits, and Drawbacks

In preparation for launching a business, it is paramount to deliberate and select an organizational and legal framework that aptly suits your enterprise. Familiarize yourself with the prevailing types of businesses. Go ahead and assess each option to discern which aligns best with your distinctive goals and individual needs.

Prevailing choices for organizational and legal forms of business in the international context

Just 3 decades ago, when entrepreneurs ventured into the realm of business, their preferred approach was to form alliances and establish legal entities. However, today, sole proprietorships reign as the most common business type. This shift is primarily attributed to the simplified requirements and reporting obligations that accompany individual business ownership.

As of 2022, the United Kingdom boasted a staggering count of over 5.5 million private businesses. Take a look at their structure below:

• 3.1 million individual entrepreneurs, accounting for 56% of the total private business number
• 2.1 million actively operating companies, constituting 37% of the above private businesses
• 353,000 simple partnerships, i.e., 6% of all private enterprises in the UK
• Approximately 1% encompassed other types of business structures.

As of now, the total number of business entities in the United States exceeds 48 million, exhibiting the following distribution:

• In crude terms, 25 million people who make approximately 51% of the overall business count are actively involved in entrepreneurial endeavors in the USA.
• Around 21.6 million entities operate as limited liability companies (LLCs), constituting around 45% of all business entities in the US.
• C-type corporations account for 1.6 million business units, making up roughly 3% of the total number.
• The remaining business structures comprise 1% of the total.

Experts recognize several prominent organizational and legal forms of ownership that enjoy widespread popularity:

• sole proprietorship
• partnership
• limited liability company
• corporation.

Let’s explore the strengths and weaknesses inherent in these business structures, as well as the goals they help businesses achieve.

Sole proprietorship

A sole proprietorship is a widely adopted form of business ownership where a sole proprietor operates the business, pays taxes on the profits, and assumes complete liability for the company’s debts.

A sole proprietorship stands out as the most straightforward business structure. It necessitates minimal documentation like a passport and an individual tax identification number during the registration.

Opting for a sole proprietorship offers distinct advantages:

• Smooth business incoropration: In certain jurisdictions, registering with the government’s commercial registry is unnecessary if you conduct business under your own name. Starting a business automatically designates the individual as a sole proprietor. However, specific activities may require you to obtain licenses, similar to those legal entities obtain.
• No need for an Employer Identification Number (EIN): If you don’t hire any employees, you don’t have to get an EIN for tax purposes. In the United States, sole proprietors may continue using their Social Security Number (SSN).
• Pass-through taxation: Business profits are subject to personal income tax only, which greatly simplifies tax obligations.
• Flexible and uncomplicated business management: The sole proprietor takes on the roles of owner, manager, and executor simultaneously. This allows for efficient decision-making and execution.

Yet, even the sun has its dark spots. By the same token, a sole proprietorship inevitably has certain demerits:

• Personal liability for business obligations: The proprietor is personally liable for any debts or liabilities their business incurs, potentially putting personal assets at risk.
• Challenges in securing capital financing: Banks and financial institutions often prefer to extend credit to companies rather than individual entrepreneurs. This makes it more difficult to obtain capital financing.

It is typical for most entrepreneurs to start their business journeys by establishing a sole proprietorship. As their business expands, they may opt to restructure into partnerships or limited liability companies. A sole proprietorship is suitable for launching various small-scale enterprises, such as retail stores, service providers, or artisanal businesses.

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Partnerships

When they need to harness capital resources, individual entrepreneurs join forces and establish partnerships. Following sole proprietorships and limited liability companies (LLCs, partnerships rank as the 3rd most prevalent form of business ownership in many countries.

There exist 3 primary partnership types. With General partnerships (GPs), all partners assume unlimited liability for the business. At the same time, limited partnerships (LPs) have 2 partner categories: general partners who are fully liable and limited partners. The latter enjoy limited liability and lack voting rights. As for limited liability partnerships (LLPs), therein, all partners have limited liability. They are not personally liable for the company’s debts or obligations.

Have a look at the advantages partnerships come with:

• Easy establishment of the business: Setting up a partnership is a straightforward process. It requires a partnership agreement, and the latter can be made either in a verbal form or in writing. Both general partnerships (GPs) and limited partnerships (LPs) are not considered legal entities, and partners have the choice to register with government registries.
• Simplified dissolution procedure: It does not take long to dissolve a partnership and the procedure itself is relatively uncomplicated. It only requires 1 partner to withdraw for the partnership to be dissolved.
• Pass-through taxation: Partnerships themselves are not subject to taxation. Instead, the partners individually pay taxes on their share of the partnership’s profits, reporting the above taxes in personal tax returns.
• Limited liability in LP and LLP: In limited partnerships (LP) and limited liability partnerships (LLP), partners have limited liability for the business debts, restricted to their respective capital contributions. This shields personal assets from being used to satisfy the partnership’s obligations.

It would be unwise on our part to omit the disadvantages of partnerships, and here they are:

• Termination upon partner departure or death: If a partner decides to leave the business or unfortunately passes away, the partnership ceases to exist.
• Limited number of partners: Partnerships have a restricted capacity for partners, usually ranging from 2 to 20 individuals. Unlike corporations, partnerships may encounter challenges in attracting significant capital.
• Difficulties in selling a partnership share: Selling a share in a partnership is at times complicated. It requires unanimous agreement among all partners regarding the suitability of the prospective buyer.

Partnerships are established in various industries as a preferred business ownership and legal structure. Here are some examples:

• Legal, accounting, consulting, and architectural professionals often form LLPs.
• LPs are popular with hedge funds and real estate investment companies.
• General partnerships (GPs) are commonly found in the medical and architectural fields.

Limited liability companies

The type of business known as a Limited Liability Company (LLC) or a Private Limited Company (PLC) is the one legal entities use widely. In the US, they call it a Limited Liability Company (LLC). In the UK, it is recognized as a Private Limited Company (PLC) or Limited (LTD).

Under UK commercial law, the capital of an LTD company is split into shares. However, you may not publicly trade the above shares on stock exchanges. Selling shares to another party requires the unanimous consent of all shareholders.

To incorporate a Limited Liability Company you need to register it in the commercial registry. Compared to establishing a partnership, LLC registration is more complex. Yet, it is simpler to incorporate one compared to a corporation.

Tax treatment of a Limited Liability Company varies depending on the jurisdiction:

• LTDs In the United Kingdom are subject to double taxation. The latter includes a corporate tax on profits and a tax on dividend distribution.
• In the US, LLCs enjoy pass-through taxation. Thereby, the LLC pays no taxes at the federal level, and the owner is liable for personal income tax payments.

Here are the benefits of Limited Liability Companies:

• Sole ownership: LLCs can be established and owned by a single individual who may also serve as the company’s director.
• LLCs combine elements of both corporations and partnerships, providing shareholders with limited liability and allowing for pass-through taxation of profits.
• Attracting venture capital and investments is often easier for LLCs compared to partnerships and sole proprietorships.

Now that you are aware of the benefits LLCs and LTDs offer, compare them with the associated drawbacks:

• Transferring or selling shares to new members requires unanimous consent from all shareholders.
• In the United Kingdom, LTD companies are subject to double taxation, involving taxes on profits and dividends.
• LLCs and LTDs are not suitable for initial public offerings (IPOs). To pursue an IPO, you will have to restructure your Limited Liability Company into a corporation.

Individual entrepreneurs in the United States frequently choose to restructure their businesses into Limited Liability Companies (LLCs) when expanding. This organizational and legal structure is particularly favored by family enterprises, as well as groups of doctors and consultants who prioritize the protection limited liability comes with.

It would be inaccurate to claim that the LLC and LTD ownership forms are exclusively suitable for small and medium-sized businesses. In the United States, many globally recognized brands have established their primary companies as LLCs:

• Alphabet, the parent company of Google
• PepsiCo Inc.
• Exxon Mobil Corp.
• Johnson & Johnson.

Corporations

In the case of a corporation, the ownership structure and legal framework are often regarded as the most complex among business entities. Its equivalent is a public limited company (PLC, AG, or SA).

A C-Corporation is the most common type of corporation in the US. It offers the advantage of complete separation between shareholders’ assets and the legal entity itself. This makes it an attractive choice for establishing large-scale businesses, as there are no restrictions on the number of shareholders.

However, owners of a C-Corporation face the challenge of double taxation. They are subject to both corporate taxes and personal income taxes on dividends.

In addition to the obligatory registration in the state registry and obtaining an employer identification number, you’ll have to establish a board of directors to set up a corporation. This aspect distinguishes it from the registration process for a limited liability company or partnership.

C-Corps and the benefits they offer:

• The C-Corp ownership structure offers the advantage of limiting personal liability for shareholders, directors, and executives.
• Corporations enjoy perpetual existence, as it is easy to change shareholders and BoD members.
• They attract capital of any magnitude. However, once a certain number of shareholders is reached, registration with the SEC becomes necessary.

C-Corps and the drawbacks they come with:

• Corporations face stricter scrutiny and oversight from regulatory bodies.
• Owners of a corporation aren’t allowed to write off losses in their individual tax returns.
• The issue of double taxation arises for owners.
• Corporations, as an organizational and legal ownership structure, are well-suited for partnerships and limited liability companies that seek business expansion. You may find numerous examples of this ownership form among large-scale companies across various industries.

Still uncertain about the optimal legal form of ownership for your future business overseas? Feel free to consult the International Wealth team of weathered experts. We offer personalized guidance and advice to help you make a well-informed decision on business incorporation issues bothering you.

To explore the services International Wealth offers for business registration in foreign jurisdictions and the opening of accounts with international banks, please reach out to us via info@offshore-pro.info. We’ll be glad to assist with making your dream a reality.