Forms of Business

Forms of BusinessChapters 27 & 28

Sole ProprietorshipPartnership

Corporation

Chapter 27: Sole Proprietorship

•Owned & operated by 1 person

•Most common type of business

•Easiest to form

•Can use a fictitious name (a name that is not the owners own name)▫Can not be a name already in use

Chapter 27: Sole Proprietorship

•Steps before starting a Sole Proprietorship:

▫Obtain a license▫Get liability insurance▫Formally file your company

Chapter 27: Sole Proprietorship

•Advantages

▫Ease of creation▫Total control▫Retention of profits▫Freedom from excessive government

control▫Taxed just once on profits

Chapter 27: Sole Proprietorship•Ease of Creation

▫The only thing you really need to begin a sole proprietorship is to begin operating the business

▫Still need to check zoning regulations▫Still need to research govt. licensing

requirements▫Must contact IRS when hiring workers to

get an employer identification number (EIN)

Chapter 27: Sole Proprietorship

•Total Control

▫All decisions are up to the sole proprietor

▫Can still seek advice (accounting, attorney, etc).

Chapter 27: Sole Proprietorship

•Retention of Profits

▫Means the owner keeps all of the profits the company makes

▫Must still pay taxes on any profits

Chapter 27: Sole Proprietorship

•Freedom from Too Much Government

▫Less paperwork is required by govt. than with other forms of business

▫More flexibility with this form of business

Chapter 27: Sole Proprietorship

•Taxation

▫Pay taxes on their INCOME not as a business

▫All profits are considered income for the sole owner of the company.

▫S.P.’s are taxed just once on this income

Chapter 27: Sole Proprietorship

•Disadvantages

▫Limited Capital▫Unlimited Liability▫Limited human resources▫Limited Lifetime

Chapter 27: Sole Proprietorship

•Limited Capital

▫Capital is $$ used to finance the business

▫Comes from S.P.’s savings or income▫Comes from loans received by S.P.

Chapter 27: Sole Proprietorship

•Unlimited Liability

▫Means the business owner is responsible for all losses experienced by business

Chapter 27: Sole Proprietorship

•Limited Human Resources

▫Typically have few employees▫Causes lots of stress▫Need to make decisions outside of

their own expertise

Chapter 27: Sole Proprietorship

•Limited Lifetime

▫The company lives only as long as the proprietor

▫If a proprietor dies or sells business the company no longer exists (becomes a new company)

Chapter 27: Partnership

•Owned & operated by 1 person

•Most common type of business

•Easiest to form

•Can use a fictitious name (a name that is not the owners own name)▫Can not be a name already in use

Forms of BusinessChapter 27: Partnerships

Chapter 27: Partnerships•Partnership Law created by the Uniform

Partnership Act

• Partnership – an association of 2+ people to carry on a business for profit

•4 advantages▫More capital available▫More credit available▫Lighter burden of work▫Partner does not have sole responsibility for

loss

Chapter 27: Partnerships• FORMING A GENERAL PARTNERSHIP

• General partnership is when 2+ parties combine their $, labor & skills to carry on a legal business

▫ 3 ways to form: By agreement By proof of existence By estoppel

Chapter 27: Partnerships• By agreement

▫ All parties must give agreement/consent to form biz

▫ Can be a written or oral agreement (contract!!!) If it will last more than a year it must be in writing Any partnership that is formed to sell, buy or

lease real property must also be in writing

Chapter 27: Partnerships• By agreement

▫Articles of Partnership is the partnership agreement or written agreement and includes: Who agrees Specific purpose, nature, scope and limits of the biz Planned duration (lifetime) of the biz Amount of $ of each partner’s original investment Provisions regarding salaries, removing funds &

splitting of profits Terms of withdrawal from partnership

Chapter 27: Partnerships• By Proof of Agreement

▫This simply means that the way 2+ people conduct their business demonstrates that it is a partnership 2 things that must exist:

Sharing of profits Conducting business together

5 exceptions to the rule: Repayment of debt Wages to an employee / or rent Annuity to the widow/widower of deceased partner Interest on a loan Consideration for the sale of the biz

Chapter 27: Partnerships• By Estoppel

▫Created when someone does/says something leading a 3rd party to believe a partnership exists & is treated so by the court

▫ This is not a real partnership but is used by the court to prevent injustice

Types of PartnersType of Partner

Participation in Business

Relationship to the Public

Degree of Liability

General Active Known Unlimited Liability

Secret Active Unknown Unlimited Liability

Silent Not active Known Unlimited Liability

Dormant Not active Unknown Unlimited Liability

Limited Not active Known Limited Liability

Every partnership must have at least 1 general partner

Chapter 27: Partnerships• TYPES OF PARTNERS

▫A secret partner is also a general partner and has an active role in the business but their connection to the business is secret (not known to the public)

▫A silent partner is a general partner who has no active role in the management of the business

▫A dormant partner is a combination of secret & silent. They have no active role & are unknown to public.

Chapter 27: Partnerships• Partnership Property

▫Property of the partnerships is separate from that owned by the business (unlike sole proprietorship)

▫Property is considered owned by the biz if: Property contributed directly to biz when it was

created Property was bought with partnership funds

•3 Property rights of Partners▫ Right to use the property▫ Right to manage the firm▫ Right to share in the profits

Chapter 27: Partnerships• Making Decisions in a Partnership

▫Any disagreement that arises is settled by the majority.

▫If there is an even # of partners and the vote is split then there is no decision.

• EXCEPTIONS▫ When a new partner is to be admitted the vote is

unanimous.▫ When a change to the essential nature of the

business is made the vote must also be unanimous

Chapter 27: Partnerships• Sharing Profits

• Partners share equally in profits• There is no consideration of initial capital

(investment) contributed by each partner• There is no consideration of the time put

in by each partner (this right is passed on to relatives of partner upon death)

Chapter 27: Partnerships• Liability

• Partners share equally in losses!• Joint Liability means in the event of a lawsuit

all partners must be sued togetherTHIS IS THE **BIGGEST DISADVANTAGE**

• Even personal property/assets can be taken should debts be owed. Even an innocent partner can be held responsible.

• EXCEPTION: Limited Liability Partner

Chapter 27: Partnerships• Dissolving A Partnership

• Dissolution is legal detachment (partnerships it is a change in the relationships of the partners)

• NOT the same as a termination/ending of a business

• Partnerships end by:▫ Death of a partner▫ Voluntary withdrawal of a partner▫ Court decree▫ When 1 partner stops association with the biz