Imagine you and a friend start selling custom phone cases. Who makes the decisions? Who keeps the money? And if a supplier is never paid, who owes the debt? The answers depend on the business's ownership structure, which is the legal way a business is owned and organized. Choosing a structure is one of the first decisions every entrepreneur makes, and it can change as the business grows.
Key words: liability, control and profit
- Liability is legal responsibility for the business's debts. A debt is money owed to someone else.
- Unlimited liability means the owner's personal belongings, such as savings or a car, can be used to pay the business's debts.
- Limited liability means owners can lose only the money they put into the business, not their personal belongings.
- Control is who makes the decisions.
- Profit is the money left after all costs are paid. A structure decides who shares it and how.
- Scale means growing a business so it can serve many more customers.
Six ways to own a business
| Structure | Who owns it | Liability | Control and profit | Cost to start |
|---|---|---|---|---|
| Sole proprietorship | One person | Unlimited | Owner decides and keeps all profit | Lowest and simplest |
| Partnership | Two or more people | Unlimited for general partners | Shared, usually by a written agreement | Low |
| Corporation | Shareholders (people who buy shares) | Limited | Shareholders elect a board of directors; profit can be paid as dividends | Highest; legal filing and more paperwork |
| Co-operative | Its members, who also use it | Limited | One member, one vote; surplus shared among members | Moderate |
| Franchise | A franchisee buys the right to use a franchisor's brand and system | Depends on the legal form chosen | Franchisor sets the rules; franchisee keeps profit after fees | Often high (fees and set-up) |
| Social enterprise or not-for-profit | A social enterprise can use any form; a not-for-profit has no owners who take profit | Depends on the form | Earnings go back into the social mission | Varies |
A few words from the table. A share is a small piece of ownership in a corporation. A dividend is a share of the profit paid to shareholders. A franchisor is the company that owns a brand, such as Tim Hortons, and a franchisee is the person who buys the right to run one location using that brand. A co-operative (or co-op) is owned by the people who use it; credit unions are a well-known example. A social enterprise is a business that earns money in order to solve a social or environmental problem. A not-for-profit organization puts any extra money back into its mission instead of paying it out to owners.
Launching and scaling with each structure
Each structure helps a business in a different way. A sole proprietorship is the fastest way to launch, which is why most student ventures start this way. A partnership brings in a second person's money and skills. A corporation makes it easier to scale, because it can sell shares to raise large amounts of money and its owners are protected by limited liability. A co-operative lets a group pool money to get something none of them could afford alone, like shared farm equipment. A franchise lets a business scale quickly using other people's money: each franchisee pays to open a location. A social enterprise can attract customers and partners who care about the mission.
Choosing a structure step by step
- Count the owners: one person, a few people, or many members?
- Size up the risk: will the business borrow money or could it be sued? Higher risk points to limited liability.
- Decide on control: do you want to make every decision yourself, share them, or give each member a vote?
- Check the budget: can you afford legal fees or franchise fees?
- Name the goal: mainly profit, or mainly a social mission?
- Compare the options with a decision matrix and choose the best fit.