Transfer of Ownership – Dutch Uncles

What are the different types of business ownership?

Pranjal Pravin — Tue, 01 Jun 2021 11:35:04 +0000

Whenever we talk or discuss about business, we usually start with terminologies like the vision, the mission of the business, how they operate, what are the different levels involved and so on.

But before jumping into the land of starting a business or even owning one, we not only need to be aware of the above or even the geographic and political factors but also ask ourselves the main question, what are the different types of businesses?

The different types of businesses give an outline of a structure to the ownership world and without a structure, anything could be read like an open book ready to be disassembled like a rusty machine.

These businesses might be owned by a single person or a small group of people or even run by a large charitable organization with a notion to help. The point of differentiation is not just the amount of people but also the legalities that follow while being a part of them.

This legal and ownership structure of a business determines various factors- from the taxes that the business needs to pay to the profit distribution, the responsibilities that the owner or multiple owners have, ultimately determining the paperwork that the businesses have to go through to finally set up.

So, what are these different types of business ownership and how do you determine which is the right one for you?

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The different types of businesses give an outline of a structure to the ownership world and without a structure, anything could be read like an open book ready to be disassembled like a rusty machine.

Sole Proprietorship or Single Ownership

As the name suggests, the ownership of this kind of business falls in the hands of one single person, who is deemed as the sole or the final decision-making authority for the business. Here, the owner is the one responsible for all the assets and liabilities including both personal and professional ones.

With the profit or loss completely being handled by them, an advantage to being a sole proprietor is that these kinds of businesses are easy to set up since you’re the ultimate decision-maker but on the other hand you have to be responsible for all the liabilities and debts at any given point of time. Looking at the positives, the expenses to start a single ownership business is majorly minimal in the beginning and it is easier and flexible for the owner to operate.

Now, this does not mean that they should work alone. Like any other organization, they can always employ people to expand their businesses but any responsibilities from hiring to firing to giving profit to bearing the debt, to raising funds, everything falls on the head of the owner.

Examples of sole proprietorship or enterprises run by a single owner could be a small shop to sell handmade goods or an auto repair shop, a working plant to provide goods carved from wood, etc.

Given the above examples, the single ownership businesses have their fair share of ups and downs but given the advantages such as minimum legal restrictions, enjoying all the profit and also managing the raw materials and manufacturing methods to yourself, these assurances give a good deal of motivation and incentive to flourish.

Partnerships

Moving on to the next type of ownership we have Partnerships. These kinds of businesses involve two or more people as the owners of the business. When the time for the owner comes to realize that the potential for their business is much more than they could handle and they might not be in a position to hold all the responsibilities and duties that come to handle a business, then comes the entry for a co-owner or co-owners depending on the decision and situation.

Now, these partnerships could be of two types:

General partnerships

Running on a similar idea of single ownership, where two or more people with the same vision and mission come together through a legal contract to grow a business. Every partner here can act as a sole owner and have full control of the business along with owning full rights to all the profits and debts sustained by the business. The incentive for success becomes high as large capital is invested from both sides and the firm can hold better talents and skills.

Along with that, if the business goes into loss, there’s more than one person to handle the situation and also attach tax advantages with the business. Examples of a general partnership could be retail trade organizations, small engineering firms, law firms, medical clinics, etc.

Limited Partnerships

A form of the partnership business, here although the partners share the profit generated from the business they can’t interfere with the management or decision making of the firm. As the word suggests, limited partners have their authority limited to the amount of investment made into the business.

Depending on the type of situation and legal contracts, these types of business are easier and also less costly so all the investors and lenders who were earlier hesitating to invest in the business have now an incentive to go ahead without much of a risk.

Joint-stock organization/Companies

There are two different types of Joint-stock organizations:

Private limited companies

The number of members for this type of business ranges from 2 to 50 excluding any employee or ex-employee shareholders. The money or capital is collected from private partners where all of them might not be active but these types of organizations restrict the right to transfer shares and avoid the public to get ownership on shares or debentures.

Although there isn’t a need for consent of directors in these types of businesses and also, they don’t need any certificate from a registrar for the initiation of business but they do require to hold a general meeting at certain periods to discuss its profit and loss generation.

They also need to send a certificate to the registrar of the companies along with the returns stating that they don’t have more than 50 shareholders on their account.

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With a democratic form of ownership, these organizations promote cooperation and mutual belief and understanding of self-help.

Public Limited Companies

Unlike private ownership, the money in here is collected through the public in small amounts of shares having a low face value. The public limited companies have to file with the registrar of Joint Stock Companies several documents. Some of them involve the consent of directors, list of directors, director’s contract etc. where they can start the business only once they receive the certificate.

These businesses are responsible for holding a statutory meeting and issuing a statutory report to all the members and also the registrar within a given time. With no restriction on the transfer of shares, the company is liable to get its account audited every year by the registered auditors’ and also hold a general meeting every year.

Since the shares are transferable, public limited companies have a huge potential to raise a good sum of money and also acquire the services of specialists. Some examples of a public limited company would be Steel mills and Fertilizer factories.

Cooperative Societies or Organizations

Containing a mix of features from both the large partnerships and some from corporations, here the members of the cooperative societies buy shares on their own and then the amalgamated profit gets distributed among its members. Each member of the society is given the right to vote only one time so that the concentration of power does not fall into few hands.

These kinds of organizations aim to provide goods and services to their members at a cost and therefore it is deemed as a kind of voluntary, democratic ownership which is usually formed by a couple of motivated members who believe in obtaining necessities of everyday life at rates lower than those of the market.

With a democratic form of ownership, these organizations promote cooperation and mutual belief and understanding of self-help. With no one man making huge profits, the monetary help for these businesses can be secured even from the government.

Examples of Cooperative Societies include Consumer cooperatives in retail trade or producer cooperatives for buying and selling items such as dairy products, grains, fruits, etc.

Public Sector Companies

There are three different ways of managing a public enterprise:
Either they are owned by the state, or they are managed by the state or they are both owned as well as managed by the state. Here enterprises fall into the hands of the government as they are the ones to control and produce the supply of goods and services which are required by the society.

These public sector companies open the doors for those industries which are in dire need of a huge amount of capital and don’t have enough resources to flourish under the umbrella of the private sector.

The consumers get the befit of greater, better and cheaper goods and also encourage the growth and nourishment of the under-developed regions of the country. Although there could be sometimes too much interference by the government and also delay in the decision-making process, at the end of the day necessities like raw materials, fuel, power and transport get made easily available to them.

Private Sector Companies

Last but not the least, private sector companies. As the name suggests, private sector companies are exactly the opposite of how the public sector companies operate. One of the points that stand out for them is that they do not indulge themselves in businesses where profit margins are low or where there is a huge risk involved.

Run by various businessmen from various sectors who possess an in-depth knowledge of the sector they come from, the profitability factor along with efficiency is always focused on very high levels along with a quick decision-making capability as compared to the public sector companies.

As there is minimal to no interference from the government, sometimes the situation leads to having a concentration of profits only in a few hands and also over-exploitation of the labour involved which results in an unbalanced growth of industries.

While looking at all these kinds of businesses, choosing the right one depends on certain factors, such as how much capital you have, how you want to handle the profit and loss management of your organization, what legalities and paperwork would be involved, so and so forth. It is indeed a tough and scary step for any entrepreneur.

There are equally compelling benefits and also hindrances that could be worrisome but the first and foremost step for any budding entrepreneur should be to educate themselves and weigh the pros and cons before stepping onto the world or business ownership. Ultimately, it requires a good amount of knowledge, confidence and support to take the first step and then eventually figure out what could be the right type of business to go for.

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Transition – The Time to Move on And Let Go

Tanisha Achrekar — Sat, 19 Dec 2020 20:08:46 +0000

Remember the mixed emotions you experienced when your school or college ended? Feeling happy and unhappy at the same time. Some things will never be missed, while other memories will be forever treasured. Change is an inevitable part of life and still the only thing that is constant. A business transition is a change in the ownership of an organisation. The transition can be anything from expanding a business, exiting it or simply taking a step back.

Preparing for a business transition is like building a house from scratch. It requires a lot of preparation. It is a step-by-step procedure where each piece needs to be in place for achieving maximum performance. The first step is deciding when the transition should be made.

Is transition management different from change management?

There is an intrinsic link between transition and change management. Transition management is a part of the change management process. Change management deals with preparing the organization and its employees for the new ownership. Whereas, a transition management plan is tailored to an individual level. The psychological impact of adjusting to the organisational change will directly impact how long the change will last. A new owner may have a new way of getting things done, which the old staff may not be comfortable with. Transition management is all about reorienting people’s needs in response to the change that occurred. For a smooth and successful change of ownership, transition and change management goals should be aligned.

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Often when you think you’re at the end of something, you’re at the beginning of something else.

- Fred Rogers

What compels a person to transition?

Often the term ‘exit strategy’ is used in selling a business or ‘cashing out’. An entrepreneur who plans and thinks ahead often has an exit strategy in his head. The few reasons why an entrepreneur may prefer to exit are:

Seizing the perfect opportunity

Many entrepreneurs prefer selling their business when a buyer makes an offer they cannot refuse. If the condition is working to an entrepreneur’s advantage, he will make a quick move of selling his business. In this case, it is essential to know in advance what your business is worth in the market. Also, the demand of potential buyers for your business. These two things will give you an idea of what you and your business deserve.

Being ready for retirement

We often hear many young adults who establish their business, make it successful, and then retire in their late 20s or early 30s. Most people do have things planned ahead of time when it comes to retirement. After you have sold your business, you should have enough money to sustain yourself for the rest of your life. Create an estimate of all possible future expenses and then tally with the reality of your company’s worth. This will reflect how ready you are for retirement.

Moving on to the next best thing

Many entrepreneurs also prefer to sell their business when they feel that they have done their part. They usually prefer to move-on to their next venture. This comes from a place of feeling saturated, bored or burned out. Selling your business is not the only way to move on. You can start a franchise if you feel your business is successful enough, you can consider merging with other companies, or even going public. These are a few alternatives worth considering if you still want to do this business on the side. However, in case you are completely done with your business, it makes sense to simply sell and move on.

Business troubles and drawbacks

A business requires capital to function. If a business is facing financial difficulties with no glimpse of hope in the future to revive it, then selling it and exiting might be the only option. Usually, when a business is sold due to financial trouble it is sold lower than its value. Simply stating why would a buyer pay heaps of profit for selling a loss incurring business? It is usually an exit strategy preferred before things get worse.

Businesses shutting down due to disputes amongst partners is not a surprising revelation. Many entrepreneurs decide to sell their business and part ways for good after constant tiffs with partners. Hiring negotiators is the last ray of hope before exiting in such circumstances

Unexpected life changes

Life does not always go as planned. Sudden changes in an entrepreneur’s life may compel the business to transition. Usually, the common life changes that lead to a business transitioning are death, divorce, and disability.

In case of a sole proprietor’s death where there is no one to take over, the transition seems the only available option. A disability where an owner ceases to function and carry out everyday business activities, the transition of a business again seems inevitable. Entrepreneurs are always advised to have long-term disability insurance especially sole proprietors.

A divorce may also lead to a change of ownership in a business and cause its transition. In most cases, parting ways from your spouse may lead to the division of all assets including your business. Many owners opt for selling their business while dividing the assets. However, if the divorce is on a mutually-good term, you may even opt for partnership.

Steps for transitioning your business efficiently

Strategic planning is a must-have if you want to transition your business smoothly and efficiently. Before the transition takes place, an entrepreneur must ensure that things are in place to support the new owners. Below are the steps worth considering for transitioning your business:

Evaluating the market

Knowing the current state of the market is vital before selling your business. Take a close look at how your business is doing and how the industry is currently functioning. This will help you understand what you can quote to your initial potential buyers.

Assembling your advisory team

The transition of a business requires lots of planning and anticipation. A team of professional advisors will help you to get all the paperwork beforehand and have everything in place. The usual advisors you will need include the insurance agent, wealth manager, estate planning attorney, and tax professionals.

Reviewing and organising important documents

Before you consider talking with potential buyers, it is essential to note that your financial records and corporate documents are all in place. The documents from when you incorporated the company to the last financial year’s balance sheet, all of it should be up-to-date. Also, have a look at the existing business contacts that exist before the transition.

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The question isn’t at what age I want to retire, it’s at what income.

- George Foreman

Knowing the worth of your company

You’ll know what your company’s worth after getting everything reviewed by your team of advisory and getting all the paperwork done. Oversee all the potential issues that might affect your sale adversely or delay it. Also, it is a good time to evaluate the overall corporate structure of your organisation. Knowing what about the business is going to work in favour or against while selling will help you estimate its worth.

Obtaining a valuation

After you know your company’s worth, get in talks with the broker to get the final figures. Figure out the range of possible quotes you are interested in selling your company for. A credentialed and experienced business appraiser will help you in calculating your business valuation.

Engaging with potential buyers

After the valuation, your business is ready for the transition. This is one of the most crucial steps in the transition. Start engaging with various buyers, see the quotes they are offering. Apart from the money aspect, you also want to ensure that the new owner is good for your employees, the reputation of your business and can meet the existing needs of your customers.

Structuring your transition

Once you have decided whom you are selling your business to, decide how to structure the transition of your business. This will require you to discuss with the buyer all the changes he plans on doing while taking over the business. Having a well-structured transition will ensure that your employees, investors and customers are minimally impacted by this change of ownership.

What are the challenges faced while transitioning a business?

Businesses are sold to either seek extreme rewards or as a compromise to come out of an existing crisis. Choosing the next owner is a huge responsibility for the current entrepreneur. There are several things he or she has to address before choosing a buyer, after choosing a buyer and even while choosing a buyer. Clearly a tedious and time-consuming process.

Financing the sale of your company

The next buyer may not have adequate funds to outright purchase the entire company. There are several funding options that are needed to be explored to get your entire share overtime. Some entrepreneurs consider seller financing or third-party financing to fund the sale of their company. You can also consider internal funding options to buy out your share eventually.

Selecting the right successor

The future of your company depends on the next owner. Choosing the right successor is one of the biggest hurdles an entrepreneur comes across. There are several factors you need to consider while considering a potential buyer. Know his or her capabilities, goodwill, ability and attitude towards taking ownership. Also, ensure that they have given enough time towards getting to know and becoming well acquainted with the company’s current structure and processes. Careful assessment while choosing a buyer is the only way to make the transition successful.

Letting go of your business

Any entrepreneur will find it hard to relinquish control over their business that they have worked relentlessly building from scratch. Minimising your role and eventually leaving your company is tougher than it sounds. There will always be that temptation to take things in hand. Letting go of managing your former employees or making deals with usual buyers will be hard. Start one step at a time here with the new successor. While training him for the company, start taking steps back eventually and put him on the pedestal.

Each and every business has its own unique manner of transitioning. For an entrepreneur, the transition of the s business can be a roller coaster ride. It is important for you to remember that you gave your best while planning the transition and choosing the right successor. For a successful transition, have a well-established relationship with your successor. It will come in handy more often than you think. Business goals keep changing and evolving over the years with more successors coming in and going out. To know more about how evolving business goals, impact an organisation, read our article on ‘business goals’.

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