Forms of Business
Chapters 27 & 28
Sole Proprietorship
Partnership
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 Business
Chapter 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
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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
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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
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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 Partners
Type 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 together
THIS 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:
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Death of a partner
Voluntary withdrawal of a partner
Court decree
When 1 partner stops association with the biz