Chapter 12: Sole Prop., Partnerships, Corporations
Sole Proprietorship
Sole
Proprietorship
and
Section
27.1
Sole
Proprietorship
Chapter 27
Partnership
Section 27.1
Sole Proprietorship
Section 27.2
The Partnership
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
What You’ll Learn
How to define sole proprietorship (p. 584)
How to create a sole proprietorship (p.
584)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
What You’ll Learn
How to identify the advantages of a sole
proprietorship (p. 585)
How to identify the disadvantages of a
sole proprietorship (p. 587)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Why It’s Important
Understanding the nature of a sole
proprietorship will help you decide when to
form that type of business association rather
than the other associations that are available
in the market today.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Legal Terms
sole proprietorship (p. 584)
fictitious name (p. 584)
employer identification number (p. 585)
unlimited liability (p. 587)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
Creation and Operation of a Sole
Proprietorship
Advantages of a Sole Proprietorship
Disadvantages of a Sole Proprietorship
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is a sole proprietorship?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
A sole proprietorship is a form of
business that is owned and operated
by one person. However, that owner
may have any number of agents or
employees.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
A sole proprietorship is the most
common type of business and the
easiest to form. Examples include:
Repair shops
Small retail stores
Service organizations
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
A person who goes into business as a
sole proprietor can choose to operate
under his or her own name or can
make up a name.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
If a sole proprietor uses anything but
his or her own name, the law calls the
made-up name a fictitious name.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
In selecting a fictitious name, sole
proprietors must not choose a
company name already in use.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
There usually are few formal
requirements in establishing a sole
proprietorship.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
Some may be required to have
Licenses to legally operate as
businesses
Occupational licenses
Certain types of liability insurance
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Creation and Operation
of a Sole Proprietorship
Some states require a formal filing
when a sole proprietorship begins or if
the sole proprietorship chooses to use
a fictitious name.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Advantages of a Sole
Proprietorship
Ease of creation
Total control
Retention of profits
Freedom from excessive
governmental control
One-time taxation of profits
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Ease of Creation
A sole proprietorship is the easiest
form of business association to form.
To create a sole proprietorship, a
person needs only to begin the
operation of the business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Ease of Creation
When a sole proprietor decides to hire
workers, he or she will have to contact
the Internal Revenue Service to obtain
an employer identification number,
which is assigned for income tax
purposes.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Total Control
In a sole proprietorship, while the sole
proprietor is free to seek the advice of
experts, such as accountants,
attorneys, and financial planners, all
decisions are up to the sole proprietor.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Retention of Profits
Sole proprietors get to keep all of the
profits that the firm makes.
They must, of course, pay taxes on
those profits.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Freedom from Excessive
Governmental Control
The regulations a sole proprietor must
follow are much less cumbersome
than the regulations required of other
types of business ownership, such as
limited partners and corporations.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
One-Time Taxation of Profits
Sole proprietorships do not pay taxes
as a business. Rather, the individual
sole proprietor who owns the business
pays taxes based upon his or her
income, which includes any profits
made by the business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Disadvantages
of a Sole Proprietorship
Limited capital
Unlimited liability
Limited human resources
Limited lifetime
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Limited Capital
All money used to finance the
business must come from the
proprietor’s savings or income, or from
loans obtained by the proprietor.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Unlimited Liability
Unlimited liability means that the
business owner is responsible for all
losses experienced by the business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Limited Human Resources
As the only person responsible for the
decisions that affect the business, a
sole proprietor is subject to
tremendous stress. Even if he or she
consults experts, the decision-making
responsibility still falls upon the owner.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Limited Lifetime
Unlike a corporation, which has
perpetual existence, a sole
proprietorship lasts only as long as the
proprietor. When the proprietor dies or
sells or closes the business, the
company no longer exists.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Amira wants to start her own
business. She really doesn’t like the
idea of working for someone else—
she wants work to suit her own
schedule and she has very definite
ideas about how a business should be
run.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Her idea is to open a slushee and fruit
juice stand near the city park.
However, she estimates the stand will
cost about $7,500 to open and she
has only saved $4,000.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Given Amira’s circumstances, name
one advantage Amira would find to
having a sole proprietorship. Name
one disadvantage.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
ANSWER
Advantage—total control;
disadvantage—limited capital.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
1. What is a sole proprietorship?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
Answer
A form of business that is owned and
operated by one person.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
2. How does a sole proprietorship
begin?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
Answer
To create a sole proprietorship, a person
needs only to begin the operation of the
business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
3. What are the advantages of a sole
proprietorship?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
Answer
Ease of creation, total control, retention of
profits, freedom from excessive
governmental control, and one-time
taxation of profits.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
4. What are the disadvantages of a
sole proprietorship?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Reviewing What You Learned
Answer
Limited capital, unlimited liability, limited
human resources, and limited lifetime.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Critical Thinking Activity
Licensing Requirements
Why does the government interfere in the
formation and regulation of some sole
proprietorships by creating licensing
requirements?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Critical Thinking Activity Answer
Licensing Requirements
Answers will vary but could recognize that
licensing requirements may be necessary
for public safety.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Legal Skills in Action
The Responsibilities of a Sole Proprietor
Your Aunt Matilda, a sole proprietor, owns a
store called Scrapbook Heaven. She has
decided to hire you and your friend Ted to
work in the store on the weekends.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Legal Skills in Action
The Responsibilities of a Sole Proprietor
Aunt Matilda is convinced that hiring you
and Ted will not involve any new
entanglement with the government.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Legal Skills in Action
The Responsibilities of a Sole Proprietor
Send Aunt Matilda an e-mail message that
explains the responsibilities of a sole
proprietor who hires additional workers.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.1 Assessment
Legal Skills in Action Answer
The Responsibilities of a Sole Proprietor
E-mails will vary, but should include that
once Aunt Matilda hires you and Ted, she
will have to contact the Internal Revenue
Service to obtain employer identification
numbers.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
End of Section 27.1
Sole Proprietorship
Section 27.2
Sole Proprietorship
Section 27.1 Sole Proprietorship
What You’ll Learn
How to define general partnership (p. 588)
How to identify the ways that a partnership
can be created (p. 588)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
What You’ll Learn
How to identify partnership rights in
relation to property (p. 593)
How to explain the effects of the
dissolution of a partnership (p. 597)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Why It’s Important
Understanding the nature of a partnership
will help you decide when to form that type of
business association.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Legal Terms
general partnership (p. 588)
articles of partnership (p. 588)
partnership by proof of existence (p. 590)
partnership by estoppel (p. 591)
tenancy in partnership (p. 593)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Legal Terms
joint liability (p. 596)
dissolution (p. 597)
registered limited liability partnership
(p. 598)
limited partnership (p. 599)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
The Nature of Partnership
Forming a General Partnership
Types of Partners
Partnership Property
Property Rights of Partners
Duties of the Partners
Liability of the Partners
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
Dissolving a Partnership
Effects of Dissolution
Distribution of Assets
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
The Revised Uniform Partnership Act
Registered Limited Liability
Partnerships
Limited Partnerships
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is a partnership?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Nature of Partnership
Partnership law is largely found in the
Uniform Partnership Act (UPA).
The UPA defines partnership as “an
association of two or more persons to
carry on a business for profit.”
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Advantages of Partnerships
More capital and credit available.
Burden of work is shared.
Responsibility for losses shared.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Disadvantages of Partnerships
Partners share in the liabilities.
Each partner is responsible for the
others’ actions.
Must share profits.
Disagreements among partners.
Death of a partner dissolves the
partnership.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Forming a General Partnership
When two or more competent parties
combine their money, labor, and skills
for the purpose of carrying on a lawful
business, they create a general
partnership.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Forming a General Partnership
General partnerships can be formed in
one of three ways:
1. By agreement
2. By proof of existence
3. By estoppel
Understanding Business and Personal Law
Sole Proprietorship and Partnership
27.2 27.1 Sole Proprietorship
Section
Partnership Formation
Partnership
by contract
Express agreement drawn up by partners
Articles of partnership
Partnership
by proof of
existence
Individuals form partnership because of
their method of doing business
Sharing of profits is prima facie evidence
Partnership
by estoppel
Third party led to believe a partnership exists
No true partnership created
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Agreement
Forming a general partnership by
agreement requires the valid assent of
all parties. Such an agreement is
usually express and may be written or
oral.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Agreement
Under the Statue of Frauds, if a
partnership is to last more than a year
or if the partnership is formed to sell,
buy, or lease real property, it must be
evidenced in writing.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Agreement
The partnership agreement is known
as the articles of partnership, or as
the articles of copartnership.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Important Points Covered
in an Agreement
Parties to the agreement
Specific nature, scope, and limits of
the business
Planned duration of the business
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Important Points Covered
in an Agreement
Amount of each partner’s original
investment and procedure for future
investments
Provisions regarding salaries,
withdrawal of funds, and the division
of profits
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Important Points Covered
in an Agreement
Terms under which a partner may
withdraw from the partnership
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Proof of Existence
Sometimes a partnership can be
formed because of the way that two or
more people conduct their business
together.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Proof of Existence
Such a partnership, which forms
regardless of the label given to the
enterprise or the intent of the parties
involved, is termed a partnership by
proof of existence.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Estoppel
If someone does or says something
that leads a third party to believe that
a partnership exists, then a court may
treat the arrangement as a
partnership by estoppel.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
By Estoppel
This type of partnership is not a real
partnership. It is a way for the court to
prevent injustice because someone
has relied on the words or actions of
another party and has acted
accordingly.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Types of Partners
There are five types of partners:
1. General
2. Secret
3. Silent
4. Dormant
5. Limited
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Types of Partners
Each of these partners is a co-owner
of the business and has some liability
for the debts of the firm.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
27.2 27.1 Sole Proprietorship
Section
Types of Partners
Type of Partner
Participation in
the Business
Relationship to
the Public
Degree of
Liability
General
Active
Known
Unlimited
Secret
Active
Unknown
Unlimited
Silent
Not active
Known
Unlimited
Dormant
Not active
Unknown
Unlimited
Limited
Not active
Known
Limited
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Partnership Property
It is important to distinguish between
property that belongs to the
partnership and property that belongs
to individual partners.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Partnership Property
Is property contributed directly to
the partnership when the
partnership is created.
Is property that is bought with
partnership funds.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Partnership Property
In addition, the court may ask certain
questions to determine whether or not
certain property belongs to the
partnership.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Property Rights of the Partners
Certain rights arise regarding property
that belongs to the partnership. These
include:
The right to use the property
The right to manage the firm
The right to share in the profits
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Right to Use Property
Partners are co-owners of all the real
and personal property included in the
partnership.
This co-ownership is called tenancy
in partnership by the UPA.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Right to Use Property
As a result, the partners can use the
property for partnership business;
however, there are limitations.
For example, a partner cannot, on his
or her own, transfer ownership of the
property.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Right to Manage the Firm
Unless a partner’s rights are limited in
the partnership agreement, each
partner has an equal voice in
managing the partnership’s business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Right to Share in the Profits
Unless there is an agreement to the
contrary, partners share equally in the
profits, regardless of their initial capital
contribution or the time devoted by
each partner to the business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Duties to the Partners
Partners must trust one another.
Each partner is an agent of the other
partner and has duties comparable to
those of an agent.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Duties to the Partners
1. To always act in good faith and in
the best interests of the firm.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Duties to the Partners
2. To always use their best skill and
judgment in looking after the firm’s
affairs.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Duties to the Partners
3. To be loyal to the firm and put the
firm’s interests first.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Liability of the Partners
Partners have unlimited liability for all
of the debts of the partnership
incurred while they are partners, even
to the extent of their personal assets.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Liability of the Partners
Partners are liable to other
members of the firm for their share
of the firm’s debts.
Partners share losses in the same
proportion that they share profits.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Liability of the Partners
Partners are jointly liable with their
partners on contracts entered into by
any member of the firm acting within
the actual or apparent scope of the
firm’s business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Liability of the Partners
Joint liability means that in the event
of a lawsuit, all the partners must be
sued together. Partners are jointly and
severally (separately) liable for torts
committed within the scope of the
firm’s business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
How do partnerships come to an end?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Dissolving a Partnership
A dissolution is a legal detachment.
The dissolution of a partnership is a
change in the relationship of the
partners that occurs when any partner
stops being associated with the
business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Effects of Dissolution
Dissolution does not necessarily bring
the business to an end.
Other partners may want to continue
in business together.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Effects of Dissolution
If so,
New financial arrangements need to
be made.
A new agreement must be drawn
up.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Effects of Dissolution
Public notice is usually given to
relieve retiring partners from liability
for any new debts.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Distribution of Assets
Upon dissolution, an accounting of the
firm’s financial affairs is necessary to
determine how the firm’s assets will be
distributed or divided.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Distribution of Assets
Liabilities are paid in this order:
1. Money owed to creditors other than
partners.
2. Money lent by partners to the firm.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Distribution of Assets
3. The original money paid into the
partnership by each partner.
4. The surplus, if any, owed to the
partners.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Distribution of Assets
If the business is insolvent:
Assets are sold to pay the creditors.
Partners are individually liable for
any unpaid balance that the sale of
the assets will not cover.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
When Jess and Joe’s Café closed,
they had $38,000 and owed $25,000
to creditors. Neither Jess nor Joe had
any outstanding loans to the business,
but each had paid $5,000 into the
business to start it.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Will Jess and Joe get their money
back? Will there be any additional
money left over?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
ANSWER
Yes, Jess and Joe will get their money
back. There will $3,000 left over.
$38,000 – 25,000 = 13,000 –10,000 =
$3,000.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is the Revised Uniform
Partnership Act?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Revised
Uniform Partnership Act
Since the UPA was written in 1914, it
has undergone extensive revision.
This new variation of the act is
referred to as the Revised Uniform
Partnership Act (RUPA).
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is a registered limited liability
partnership?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Registered Limited
Liability Partnerships
A registered limited liability
partnership (RLLP) is a new type of
partnership designed to eliminate a
major disadvantage of the general
partnership—joint and several liability.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Registered Limited
Liability Partnerships
Partners of an RLLP can escape joint
and several liability for the torts,
wrongful acts, negligence, or
misconduct of other partners by
registering with the appropriate state
office.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is a limited partnership?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Limited Partnership
According to RUPA, a limited
partnership is “a partnership formed
by two or more persons. . . having one
or more general partners and one or
more limited partners.”
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Limited Partnership
Limited partnerships are often used in
real estate ventures and tax shelter
investments.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
1. What is a general partnership?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
Answer
An association of two or more persons to
carry on a business for profit.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
2. How can a partnership be created?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
Answer
By agreement, by proof of existence, and
by estoppel.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
3. What are the partner’s rights in
relation to property?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
Answer
The right to use partnership property, the
right to manage the firm, and the right to
share profits.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
4. What are the effects of the
dissolution of a partnership?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
Answer
Dissolution need not end a partnership.
Other partners may wish to continue the
business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
Answer
New financial arrangements must be made
in regard to the new firm. A new agreement
must be drawn up regarding the conduct of
the new firm.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 27.2 Assessment
Reviewing What You Learned
Answer
Public notice must usually be given in order
to relieve the retiring partners from liability
for any new debts created by the new firm.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
End of Section 27.2
Sole Proprietorship
Section 28.1
Sole Proprietorship
Section 27.1 Sole Proprietorship
What You’ll Learn
How to define corporation (p. 606)
How to distinguish among various types of
corporations (p. 607)
How to create a corporation (p. 608)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
What You’ll Learn
How to finance a corporation (p. 614)
How to distinguish between a corporation
and a limited liability company (p. 616)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Why It’s Important
Understanding the nature of a corporation
will help you decide when to form one rather
than the other associations that are
available.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Legal Terms
corporation (p. 606)
shareholder (p. 606)
share (p. 606)
promoter (p. 608)
articles of incorporation (p. 610)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Legal Terms
certificate of incorporation (p. 612)
common stock (p. 614)
dividends (p. 614)
preferred stock (p. 614)
limited liability company (p. 616)
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
The Nature of a Corporation
Advantages of a Corporation
Disadvantages of a Corporation
Types of Corporations
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
Forming a Corporation
The Incorporation Process
Corporate Financing
Forming a Limited Liability
Company
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section Outline
Incorporation Problems
De Facto Corporation
Corporation by Estoppel
Piercing the Corporate Veil
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is a corporation?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Nature of a Corporation
A corporation is a body formed and
authorized by law to act as a single
person, distinct from its members or
owners.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Nature of a Corporation
About 90 percent of all business in
the United States is done by
corporations.
Not all corporations are large
businesses. Approximately 40
percent of all corporations employ
fewer than five employees.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Nature of a Corporation
An individual who owns shares of a
corporation is called a shareholder
or a stockholder.
A share is a single unit of
ownership of a corporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Nature of a Corporation
Each shareholder has one vote for
each share of stock that he or she
owns.
Shareholders cast their votes to
elect a board of directors whose
duty is to direct the corporation’s
business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Advantages of a Corporation
Selling shares enables a
corporation to tap into a large
source of capital.
Shareholder’s liability is limited to
the amount of money he or she paid
for shares in the corporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Advantages of a Corporation
It is a legal entity and has the power
to make contracts, buy and sell
goods, and sue and be sued.
It has continuity of existence,
regardless of the lifespans of
founders, shareholders, and
directors.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Disadvantages of a Corporation
A corporation’s income may be
taxed more than once. First as the
company profits; then shareholders’
dividends become part of their
taxable income.
Large corporations face extensive
government regulation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Disadvantages of a Corporation
Original founders can lose not only
control but also actual ownership.
Because of the prominence of some
corporations, business decisions
may be subject to close scrutiny.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
28.1 27.1 Sole Proprietorship
Section
Types of Corporations
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
How is a corporation formed?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Forming a Corporation
Each state has its own version of
corporate law. States may use:
The Model Business Corporation
Act (MBCA)
The Revised Model Business
Corporation Act (RMBCA)
Their own statutes
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Incorporation Process
1. A promoter carries out the
incorporation process by taking the
initial steps to organize and finance
a business.
2. Promoters choose a corporate
name.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Incorporation Process
3. Promoters are responsible for
drawing up and filing the articles of
incorporation, an application for
incorporation of a business that
describes a corporation’s
organization, powers, and authority.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Incorporation Process
4. A filing fee completes the
application.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Incorporation Process
5. After the application is approved by
the secretary of state, the
corporation receives a certificate of
incorporation, its official
authorization to do business in the
state (also called a charter).
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
The Incorporation Process
6. Initial shareholders elect a board of
directors who replace the original
incorporators.
7. Directors elect a chairman and top
corporate officers to manage the
company.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Articles of Incorporation
The articles of incorporation usually
include the following information:
Name of the corporation, including
the words company, incorporated,
or corporation or appropriate
abbreviations.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Articles of Incorporation
Proposed duration of the
corporation.
Purpose(s) of the corporation.
Number, classes, and value of
corporate shares.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Articles of Incorporation
Shareholders’ rights in relation to
shares, classes of shares, and
special shares.
Address of the original registered or
statutory agent.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Articles of Incorporation
Names and signature of the initial
directors.
Names and signatures of the
incorporators.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Corporate Financing
A corporation may choose to issue
several different kinds of stock. Along
with each share of stock come certain
rights.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Types of Stock
Common stock is the basic form of
corporation ownership.
Owners have voting rights.
It pays dividends, or profits, to the
shareholders based on the
corporation’s performance.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Types of Stock
Preferred stock is the second type of
stock issued by a corporation.
Owners have no voting rights.
But do receive a fixed dividend.
Preferred stock dividends are paid
before common stock dividends.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Draw a flow chart that describes the
relationship between the following
people.
Board of directors
Initial shareholders
Chairperson
Top corporate officers
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
ANSWER
Initial shareholders hire board of
directors who elect the chairperson
and top corporate officers.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
What is a limited liability company?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Forming a Limited
Liability Company
A limited liability company (LLC) is
a new type of business enterprise that
has been adopted by all states. It is a
combination of a partnership and a
corporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Forming a Limited
Liability Company
LLCs offer limited liability to its
owners.
Like the partners in a partnership,
the owners of an LLC escape
double taxation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Forming a Limited
Liability Company
LLCs are statutory entities—they can
be formed only if owners follow the
legal steps required—and must also
have a statutory agent for service of
process.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Pre-Learning Question
How does the law deal with
incorporation problems?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Incorporation Problems
The courts have developed two
doctrines—de facto corporations and
corporation by estoppel—to deal with
incorporation problems.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
De Facto Corporation
Even when making a good faith
attempt to incorporate, promoters
sometimes inadvertently make an
error in filing, or fail to complete the
incorporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
De Facto Corporation
The laws says that, although the
corporation does not exist in law (de
jure), it does exist in fact (de facto).
This type of corporation is called a de
facto corporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Corporation by Estoppel
Like other estoppel doctrines,
corporation by estoppel stops people
from denying the consequences of
their own actions.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Corporation by Estoppel
Corporation by estoppel usually
occurs when some party has been
willing to treat a person or a group of
people as a corporation, generally
reaping some benefit from the
relationship.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Corporation by Estoppel
When this happens, the court will not
allow that party to then deny the
existence of the corporation because
doing so would be unfair.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Piercing the Corporate Veil
Sometimes there are extreme
circumstances in which the courts will
deny shareholders the benefits of
limited liability and hold them
personally liable. This is known as
piercing the corporate veil.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
1. What is a corporation? Who are its
owners?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
Answer
An artificial person created by law owned
by shareholders or stockholders.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
2. What are the two main types of
corporations?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
Answer
Public and private.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
3. What are the steps necessary to
form a corporation?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
Answer
Promoters choose a corporate name, draw
up and file articles of incorporation with the
office of the secretary of state, pay the
filing fee, and receive the certificate of
incorporation;
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
Answer
initial shareholders elect a board of
directors; and directors elect a chairman
and top officers to manage the corporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
4. How are corporations financed?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
Answer
By selling shares of stock in the
corporation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
5. What is the difference between a
corporation and a limited liability
company?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Reviewing What You Learned
Answer
A limited liability company is a combination
of a partnership and a corporation. Like a
corporation, it offers limited liability to its
owners. Like a partnership, the owners
escape double taxation.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Critical Thinking Activity
Advantages and Disadvantages of
a Corporation
If you had a chain of very successful
restaurants in a large city, why might you
decide to incorporate the business? Why
might you decide not to incorporate?
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Critical Thinking Activity Answer
Advantages and Disadvantages of
a Corporation
Answers will vary, but could include raising
capital for further expansion as an
advantage and additional government
regulation as a disadvantage.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Legal Skills in Action
Forming a Corporation
Your brother, Dirk, wants to start a
business manufacturing playground
equipment using recyclable materials, such
as plastics and old tires.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Legal Skills in Action
Forming a Corporation
He wants to organize his company as a
corporation in order to raise capital to build
his manufacturing plant, but he isn’t sure
how to go about it.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Legal Skills in Action
Forming a Corporation
Write a letter to Dirk outlining the steps he
should take to incorporate his business.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
Section 27.1 Sole Proprietorship
Section 28.1 Assessment
Legal Skills in Action Answer
Forming a Corporation
Letters will vary, but should include
contacting the secretary of state’s office in
Dirk’s state.
Understanding Business and Personal Law
Sole Proprietorship and Partnership
End of Section 28.1
Sole Proprietorship