PowerPoint Slides to Accompany
BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman
Chapter 31
Entrepreneurs and Sole
Proprietorships
Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA
Copyright © 2004 by Prentice-Hall. All rights reserved.
Entrepreneur
A person who forms and operates
a new business either by him- or
herself or with others.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 2
Entrepreneurial Forms of Conducting Business
Sole
Proprietorship
General
Partnership
Limited
Partnership
Limited Liability
Partnership
Corporation
Limited Liability
Company
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 3
Sole Proprietorship
A form of business where the owner is
actually the business.
 The business is not a separate legal entity.
 Sole proprietorships are the most common
form of business organization in the United
States.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 4
Creation of a Sole Proprietorship
There are no formalities.
 No federal or state government approval is
required.
 Some local governments require all
businesses (including sole proprietorships) to
obtain a license to do business within the city.
 A sole proprietorship can operate under the
name of the sole proprietor or a trade name.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 5
Creation of a Sole Proprietorship
(continued)

A sole proprietorship is not a separate taxpaying entity for federal income tax purposes.


A sole proprietor need not file an informational
return with the Internal Revenue Service (IRS).
Income and losses are reported on the sole
proprietor’s personal income tax return.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 6
Advantages of a Sole Proprietorship
The ease and low cost of formation.
 The owner’s right to make all management
decisions concerning the business.



Including those involving hiring and firing
employees.
The sole proprietor owns all of the business
and has the right to receive all of the
business’s profits.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 7
Advantages of a Sole Proprietorship
(continued)

A sole proprietorship can be easily
transferred or sold if and when the owner
desires to do so.

No other approval (such as from partners or
shareholders) is necessary.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 8
Disadvantages of a Sole Proprietorship
The sole proprietor’s access to capital is
limited to personal funds plus any loans he or
she can obtain.
 The sole proprietor is legally responsible for
the business’s contracts and the torts
committed by the proprietor and his or her
employees in the course of employment.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 9
Personal Liability of a Sole Proprietor

The sole proprietor bears the risk of loss of
the business.


The owner will lose his or her entire capital
contribution if the business fails.
The sole proprietor has unlimited personal
liability.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 10
Personal Liability of a Sole Proprietor
(continued)
Creditors may recover claims against the
business from the sole proprietor’s personal
assets.
 The law holds that a sole proprietorship is
not a distinct legal entity.
 The sole proprietorship and the sole
proprietor are one and the same.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 11
Personal Liability of a Sole Proprietor
(continued)
Sole
Proprietorship
Debt or obligation
owed
Third Party
Capital investment
Sole
Proprietor
(Owner)
Personal liability for sole
proprietorship’s debts and
obligations
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 12
Conducting International Business:
Direct Export and Import Sales
The simplest form of conducting international
business is to engage in direct export or
import sale.
 The main benefits of conducting international
business this way are:

It is inexpensive
 It usually involves just entering into contracts

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 13
Conducting International Business:
Sales Agents and Representatives

Companies wishing to do business in a foreign
country often appoint a local agent or
representative to represent them in that country.

Sales Representative – may solicit and take
orders for his or her foreign employer.
 Does
not have authority to bind the company
contractually.

Sales Agent – may enter into contracts on
behalf of his or her foreign employer.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 14
Conducting International Business:
Foreign Distributor

A foreign distributor is generally used when a
company wants a greater presence in a
foreign market than is possible through a
sales agent or representative.
A local firm separate and independent from
the exporter.
 Usually given an exclusive territory.
 Takes title to the goods and makes a profit on
the resale of the goods in the foreign country.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 15
Conducting International Business Using a
Branch Office

Branch Office – used where a corporation
wants to enter a foreign market in a
substantial way but wants to retain exclusive
control over the operation.
It is not a separate corporation or legal entity.
 It is an extension of the corporate owner.
 It is wholly owned by the home corporation.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 16
Conducting International Business Using a
Branch Office (continued)
Corporation A
(in Country A)
No limited liability shield –
Corporation A in Country A is liable
for the tort and contract liabilities of
its branch office in Country B.
Branch Office
(in Country B)
The branch office is
not a separate legal
entity.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 17
Conducting International Business Using a
Subsidiary Corporation

Subsidiary Corporation – A separate
corporation established by the parent
corporation to conduct business in a foreign
country.
Must be formed pursuant to the laws of the
country in which it is to be located.
 The parent corporation and the subsidiary
organization are separate legal entities that are
individually capitalized.

Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 18
Conducting International Business Using a
Subsidiary Corporation (continued)
Corporation A
(in Country A)
Limited liability shield – Corporation A
in Country A is not liable for the tort and
contract liabilities of its subsidiary
corporation in Country B except up to
its capital contribution in Corporation B.
Corporation B
(in Country B)
Corporation B is a
separate legal entity.
Copyright © 2004 by Prentice-Hall. All rights reserved.
31 - 19