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Introduction to Business
Business Forms
Sole Proprietorships
and
Partnerships
Professor Kenneth EA Wendeln
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©2008 KEAW L3
Forms of Business Ownership
In the United States, an owner can select from a
variety of specific forms of business ownership.
The form of ownership that is selected affects:
1.
2.
3.
4.
5.
Legal charter & documents needed
Regulatory & reporting requirements
Financial resources available
Owners’ liability & risk of losses
Taxes - liabilities & benefits


affecting the business
affecting the owners (shareholders, partners, or members)
6. Length of life
7. Transfer of ownership
8. Ease of termination
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Business Forms - Sole Proprietorships & Partnerships
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General Categories
of Business Ownership
1. Sole Proprietorship
2. Partnership

General Partnership

Limited Partnership

Limited Liability Partnership or ‘LLP’
3. Corporation

‘C’ Conventional Corporation

‘S’ Corporation
4.
-
Limited Liability Company
The different forms have evolved in response
to the specific needs of business people.
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Business Forms - Sole Proprietorships & Partnerships
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Other Types of
Business Ownership
1. Government-owned Corporations



Owned & operated by local, state or federal government
Usually provides a service the business sector is unable to offer
‘Quasi-government’ corporations - partly business and partly
government owned – eg NASA, TVA, FDIC
2. Not-for-Profit or Nonprofit Corporations


Provide social, educational, religious or other services
Not intended to earn a profit
3. Cooperatives


An association of individuals or firms
Purpose is to perform some business function – eg Agricultural Co-op
4. Joint Ventures


Agreement between two groups to form a business entity
Usually to form a specific goal or for a specific period of time
5. Syndicates

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Temporary association to perform a task that requires large
amounts of capital – eg underwrite insurance, loans, investments
Business Forms - Sole Proprietorships & Partnerships
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Relative Business Ownership
in the US in 2004-2005
Number of Tax Returns
Business Revenues
Corporations
5.1 M
Corporations
20.0%
Partnerships
2.1 M
8.4%
Partnerships
Non-Farm Sole
Proprietorships
18.3 M
71.6%
$2,569 B
$19,308 B
84.4%
11.2%
$1,017 B
4.4%
Source: US Census Bureau, Statistical Abstract of the United States, 2004-05, www.census.gov
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Business Forms - Sole Proprietorships & Partnerships
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Entities Governing
Forms of Business Ownership
Forms
of
Ownership
IRS
Income &
FICA Taxes
STATE
Legal
Charters
Sole Proprietorships
Partnerships
• General
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• Limited
• ‘LLP’
Business Forms - Sole Proprietorships & Partnerships
L3-6
Entities Governing
Forms of Business Ownership
Forms
of
Ownership
IRS
Income &
FICA Taxes
STATE
Legal
Charters
SEC
Securities
Regulations
Sole Proprietorships
Partnerships
• General
http://www.IN.gov/sos/
• Limited
• ‘LLP’
Limited Liability Companies
• Multi-member
• Single-member
Corporations
• ‘C’ Corps
http://www.sec.gov/
• Publicly
Traded
• ‘S’ Corps
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Business Forms - Sole Proprietorships & Partnerships
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Sole Proprietorship
A business owned (and usually operated)
by a single owner – the ‘proprietor’.
 The most popular form of business formation –
13.3 million non-farm sole proprietorships represent 72% of all firms
in the United States.
 Usually small - averaging $50,000 in revenue, or only 4.4% of
the total revenues of all US companies.
 Treated as an ‘extension’ of the owner –
 Earnings (and losses) are treated as personal income received by
the owner and subject to personal income and Social Security
taxes imposed by the IRS.
 Owner has personal liability for all debts & obligations of the sole
proprietorship.
Minimal formalities are required
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Business Forms - Sole Proprietorships & Partnerships
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Relative Business Ownership
in the US in 2004-2005
Number of Tax Returns
Non-Farm Sole
Proprietorships
18.3 M
71.6%
Business Revenues
$1,017 B
4.4%
Source: US Census Bureau, Statistical Abstract of the United States, 2004-05, www.census.gov
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Business Forms - Sole Proprietorships & Partnerships
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Entities Governing
Forms of Business Ownership
Forms
of
Ownership
IRS
Income &
FICA Taxes
Sole Proprietorships
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Business Forms - Sole Proprietorships & Partnerships
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Advantages of
Sole Proprietorships
1. Ease of startup

Minimal legal & filing requirements
2. Retention of all profits (& losses)

Startup ‘losses’ may be offset by other personal
income
3. High personal control & flexibility
4. Taxed ‘once’ as personal income

On schedule ‘C’ or ‘C-EZ’ of IRS form 1040 at
personal tax rates
5. Secrecy

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Minimal or no reporting requirements
Business Forms - Sole Proprietorships & Partnerships
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Disadvantages of
Sole Proprietorships
1. UNLIMITED personal liability

For the debts and obligations of the
sole proprietorship
2. Lack of business continuity


Sole Proprietor is an ‘extension’ of the owner
Ceases when the owner dies or is deemed
incompetent
3. Difficult to transfer ownership
4. Limited access to external funding

Funds provided by or ‘guaranteed’ by the owner
5. Limited management skills

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Difficulty in hiring and retaining employees
Business Forms - Sole Proprietorships & Partnerships
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IRS Schedule C-EZ (1040)
for Sole Proprietorship
Tracy Topspin
312 56 2456
and Schedule SE
(for social security
taxes due) with
their IRS Form
1040 individual
tax return
Tennis Lessons
320
Revenues
- Expenses
2136
= Net Profit
$ 2456
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A sole proprietor
would file a
Schedule C
(or Schedule C-EZ
with net profit)
Reported on 1040
Business Forms - Sole Proprietorships & Partnerships
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‘Informal Forms’ - Summary
Sole Proprietorships
Forms
of
Ownership
IRS
Income &
FICA Taxes
Sole Proprietorships
An ‘extension’
of the individual involved:
•
•
•
•
Easy to form - no legal charter required
UNLIMITED personal liability for the business
Single taxation at personal tax rates
IRS Schedule C or C-EZ (1040) for income
reporting
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Business Forms - Sole Proprietorships & Partnerships
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Partnership
A voluntary association of two or more persons
who act as co-owners of a business for profit.
 Popular form of business formation, especially
among professional services’ organizations 2.1 million partnerships represent 8.4% of all firms in the US.
 Vary in size & number of partners - averaging $630,000
in revenue, or 11.2% of the total revenues of all US companies
 Must have at least one General Partner -
General Partners are jointly and severally (individually) liable for all
the debts & obligations of the partnership.
 Earning (and losses) are allocated to the partners
– treated as personal income received by each partner.
Limited Partnerships & LLPs provide SOME
liability protection to certain classes of partners
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Business Forms - Sole Proprietorships & Partnerships
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Types of Partnerships
1. General Partnership

Includes ONLY General Partners




General Partners have SHARED RESPONSIBILITY
for operating a business
Each General Partner can enter into contracts
on behalf of all the others
Each General Partner assumes FULL LIABILITY for the debts
and obligations of the partnership
Formal Partnership Agreement recommended but not required
2. Limited Partnership


Must have at least ONE General Partner who
assumes FULL LIABILITY and operates the business
May have Limited Partners who do NOT PARTICIPATE in operating
the business but provide capital & have LIMITED LIABILITY
3. Limited Liability Partnership (LLP)


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Newer type that provides LIMITED ‘PROFESSIONAL’
LIABILITY for the acts of other Partners
Must have a Partnership Agreement & meet certain requirements
Business Forms - Sole Proprietorships & Partnerships
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Advantages of
Partnerships
1. Ease of startup

Minimal legal & filing requirements for General
Partnerships

Limited Partnerships & LLPs must file with the State
2. Greater potential access to funding

Partners can pool their funds and contribute assets
3. Retention of all profits (& losses)

As in a sole proprietorship, all profits belong to the
owners of the partnership
4. Combined business skills & expertise of
the partners
5. Partnership income is taxed ‘once’ as
personal income to the partners
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Business Forms - Sole Proprietorships & Partnerships
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Disadvantages of
Partnerships
1. UNLIMITED personal liability for General
Partners

Limited Partners and LLPs provide some limited
liability but are more cumbersome to set up
2. Lack of continuity

Partnership terminated if any of the General
Partners dies, withdraws or deemed incompetent
3. Management by consensus is difficult


General Partners must be able to work as a team
Each General Partner can enter into contracts on
behalf of the others
4. Frozen Investment


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It is easy to invest in a partnership
Sometimes quite difficult to get investments out
Business Forms - Sole Proprietorships & Partnerships
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Recommended
Partnership Agreement
1. Names of the partners
2. Nature, name & address of the business
3. Duration of the partnership
4. Contribution of capital
5. Duties of each partner
6. Salaries, withdrawals and distribution of
profits and losses
7. Termination
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
Dissolution provisions

Distribution of assets
Business Forms - Sole Proprietorships & Partnerships
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‘Informal Forms’ - Summary
Sole Proprietorships & Partnerships
Forms
of
Ownership
IRS
Income &
FICA Taxes
Sole Proprietorships
Partnerships
• General
An ‘extension’ of the individual s
involved:
• Easy to form - no legal charter required
• UNLIMITED personal liability for the business
• Single taxation at personal tax rates
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Business Forms - Sole Proprietorships & Partnerships
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IRS Forms for Partnerships
Form 1065 & Schedule K-1
T & C Tennis Pro Shop
The Partnership must
file a Form 1065
Partnership Return –
that determines the
Partnership Income
NO taxes are paid by
the Partnership
Tracey
Topspin
Each partner
receives a
Schedule K-1
that informs the
partner of his share
of the Partnership’s
income, credits and
deductions
Each partner
includes their share
in their Form 1040
individual tax
returns
http://www.irs.gov/
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Business Forms - Sole Proprietorships & Partnerships
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‘Formal Forms’ of Partnerships
Limited & Limited Liability Partnerships
Forms
of
Ownership
IRS
Income &
FICA Taxes
STATE
Legal
Charters
http://www.in.gov/sos...
Sole Proprietorships
Partnerships
• General
• Limited
• ‘LLP’
• Limited Partnerships &
Limited Liability Partnerships (LLP’s)
offer some ‘limited’ liability
• Must have a ‘legal charter’ with the state
• Single Taxation at personal tax rates
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Business Forms - Sole Proprietorships & Partnerships
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Business Forms - Sole Proprietorships & Partnerships
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