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Sole Proprietorship
The sole proprietorship is the oldest, most
common, and simplest form of business
organization. A sole proprietorship is a business
entity owned and managed by one person. The
sole proprietorship can be organized very
informally, is not subject to much federal or
state regulation, and is relatively simple to
manage and control.
The prevalent characteristic of a sole
proprietorship is that the owner is inseparable
from the business. Because they are the same
entity, the owner of a sole proprietorship has
complete control over the business, its
operations, and is financially and legally
responsible for all debts and legal actions
against the business. Another aspect of the
"same entity" aspect is that taxes on a sole
proprietorship are determined at the personal
Sole Proprietorship
A sole proprietorship is a good
business organization for an
individual starting a business
that will remain small, does
not have great exposure to
liability, and does not justify
the expenses of
incorporating and ongoing
corporate formalities.
Sole Proprietorship - Points
to Consider
• Easiest type of business organization to establish. There are no
formal requirements for starting a sole proprietorship
• Decision making is in direct hands of owner.
• All profits and losses of the business are reported directly to the
owner's income tax return.
• The startup costs for a sole proprietorship are minimal.
• Owner has unlimited liability. Both the business and personal
assets of the sole proprietor are subject to the claims of creditors.
• Because a sole proprietorship is not a separate legal entity, it
usually terminates when the owner becomes disabled, retires, or
dies. As a result, the sole proprietorship lacks continuity and does
not have perpetual existence like other business organizations.
• It is difficult for a sole proprietorship to raise capital. Financial
resources are generally limited to the owner's funds and any loans
outsiders are willing to provide.
• Owner could spend unlimited amount of time responding to
business needs.
Sole Proprietorship
- Key Attributes
• Creation (minimum requirements) - No Formalities
for creating a sole proprietorship.
• Profits / Losses / Distributions - Owner may use all
profits and losses for business.
• Liability - Owner faces unlimited personal liability.
• Capital / Financing - All capital obtained from owner
or through loans based on owner's creditworthiness.
• Duration - Usually no continuity upon disability,
retirement or death of owner.
• Transfer of Ownership - Assets may be sold in
entirety or in part.
• Management and Control - Owner manages and
controls the company.
• Taxation - The business does not file or pay taxes.
• Reporting Requirements - None.
• Fees - None.
Sole Proprietorship
• Easiest and least expensive form of ownership to
• Sole proprietors are in complete control, and
within the parameters of the law, may make
decisions as they see fit.
• Sole proprietors receive all income generated by
the business to keep or reinvest.
• Profits from the business flow-through directly to
the owner's personal tax return.
• The business is easy to dissolve, if desired.
Sole Proprietorship
• Sole proprietors have unlimited liability and
are legally responsible for all debt
• Against the business. Their business and
personal assets are at risk.
• May be at a disadvantage in raising funds
and are often limited to using funds from
personal savings or consumer loans.
• May have a hard time attracting high-caliber
employees, or those that are motivated by
the opportunity to own a part of the
• Some employee benefits such as owner's
medical insurance premiums are not directly
deductible from business income (only
partially deductible as an adjustment to
• Partnerships consist of two or more partners who are both responsible
for business. They share assets, profits, liabilities, and management
responsibilities for running their business. These partnerships provide
a means of raising capital, and also allow several people to combine
resources and expertise. However here are some of the
• Partners may have different visions or goals for the business.
• There may be unequal commitment of time and finances.
• There may be personal disputes.
• Partners are personally liable for the business debts and liabilities.
• Each partner may be liable for debts incurred, decisions made, and
actions taken by the other partner.
• A partnership is an association of two or more persons who co-own a
business for a profit. A partnership is easily formed by two or more
people who jointly agree to form the business. It requires no
governmental action. It does not even require a written agreement
although one is strongly recommended. When a partnership is formed
and there is no agreement, it can be very difficult to substantiate a
case when legal action is required.
• A partnership is a type of business
entity in which partners (owners)
share with each other the profits or
losses of the business. Partnerships
are often favored over corporations
for taxation purposes, as the
partnership structure does not
generally incur a tax on profits before
it is distributed to the partners (i.e.
there is no dividend tax levied).
However, depending on the
partnership structure and the
jurisdiction in which it operates,
owners of a partnership may be
exposed to greater personal liability
than they would as shareholders of a
Characteristics and Types
of Partnership
The Written Partnership Agreement
when a written agreement is entered into, the following
points should be clarified in the agreement:
1. Name, location, and nature of the business.
2. Name, initial capital investment, and responsibilities of
each partner.
3. Method of sharing profits and losses.
4. Withdrawals of assets allowed to each partner.
5. Procedures for settling disputes between the partners.
6. Procedures for admitting new partners.
7. Procedures for handling the withdrawal of a partner or
8. Procedures for liquidating the partnership.
Characteristics and Types
of Partnership
Limited Life
• The life of a partnership is limited to the length of time that
all partners continue to own the business. If one partner
withdraws from the partnership, it ceases to exist. The
death of a partner also dissolves the partnership. If a new
partner enters the partnership, the old partnership ceases
and a new one begins.
Mutual Agency
• Every partner in the partnership can bind the business to a
contract within the scope of the partnership's regular
business. This means that an individual partner, acting on
her own, without any input from the other partner (s) can
enter into a contract that binds all of the the partners to
fulfillment of the contract. The contract, must however, be
of a usual nature for the type of business the partnership is
involved in.
Characteristics and Types
of Partnership
Unlimited Liability
• if there are not enough partnership assets to pay the debts
of the partnership, the partner’s personal assets are at
risk. This is, perhaps, one of the biggest drawbacks to the
partnership form of business. As our society becomes
increasingly litigious, and as jury awards become
increasingly large, business people have tended to shy
away from partnerships to protect their personal assets.
• The limited partnership is one way to get away from
unlimited liability. In the limited partnership, there must
be one or more general partners who assume unlimited
liability and an unlimited number of limited partners whose
exposure is limited to their investment. Several major
league sports teams operate as limited partnerships.
Characteristics and Types
of Partnership
Co-Ownership of Property
• All assets and liabilities that an individual
partner invests in the partnership become the
property of the partnership itself
• No Taxation of Partnerships
• A partnership pays no income taxes on its net
income. Instead, the net income of the
partnership is divided among the partners and
they pay income taxes on their individual shares
of the net income.
Owner's Equity Accounts for Partners
• The major difference in partnership accounting
as compared to proprietorship accounting has to
do with the owner's equity accounts. In
partnership accounting, the owner's equity
section of the balance sheet contains one line
for the owner's equity of each partner. You will
see more about this later.
Types of Partnerships
• There are two types of
partnerships: general
partnerships and limited
partnerships. Each is
explained below. General
• In a general partnership,
each partner is a full owner of
the business with all of the
privileges and risks of
ownership. Each partner
shares in gains and losses of
the partnership. Each general
partner also shares in unlimited
liability which characterizes
general partnerships.
Types of Partnerships
• In a limited partnership, there are at
least two classes of partners. There
must be at least one general partner who
is responsible for managing the business
on a daily basis. If the business fails, the
general partner or partners is fully liable
for any debts that the partnership cannot
pay out of partnership assets. The
second class of partners are the limited
partners who generally put up the largest
share of the assets. The limited
partners, because of their investments,
usually have first claim to the net income
of the partnership, but only to a certain
amount. Any excess profits go to the
general partners for their expertise in
running the business.
Types of Partnerships

• There are also limited liability partnerships.

Limited Liability Partnerships are easily
identified because L.L.P. follows the name of the
business. Although the liability of the individual
partners is limited, these types of business are
forced to carry significant insurance policies to
protect the public.  The large public accounting
firms are good examples of limited liability
Business Partnership
• Partnerships are relatively easy to establish;
however time should be invested in developing the
partnership agreement.
• With more than one owner, the ability to raise funds -
Debt vs Equity may be increased.
• The profits from the business flow directly through to
the partners' personal tax returns.
• Prospective employees may be attracted to the
business if given the incentive to become a partner.
• The business usually will benefit from partners who
have complementary skills.
Business Partnership
• Business Partners are jointly and individually
liable for the actions of the other partners.
• Profits must be shared with others.
• Since decisions are shared, disagreements can
• Some employee benefits are not deductible from
business income on tax returns.
• The partnership may have a limited life; it may
end upon the withdrawal or death of a partner.
• A corporation is a legal
entity that can exist
separately from its owners.
Creation of a corporation
occurs when properly
completed articles of
incorporation (called a
charter or certificate of
incorporation in some
states) are filed with the
proper state authority, and
all fees are paid.
What are the advantages of
• One of the primary advantages of corporation is the
limited liability the corporate entity affords its
shareholders. Typically, shareholders and directors
are not liable for the debts and obligations of the
corporation; thus, creditors will not come knocking at
the door of a shareholder or director to pay debts of
the corporation. In a partnership or sole
proprietorship the owner's personal assets may be
used to pay debts of the business. Maintaining the
limited liability of a corporation requires that the
shareholders and directors follow all the rules of
governance, including holding annual meetings and
maintaining meeting minutes, which is why we offer
corporate forms disks and corporate kits as part of
our complete incorporation package.
Other advantages
• A corporation's life is not dependent upon its members. A
corporation possesses the feature of unlimited life. If an owner
dies or wishes to sell his or her interest, the corporation will
continue to exist and do business.
• Retirement funds and qualified retirement plans (like 401k) may
be set up more easily with a corporation.
• Ownership of a corporation is easily transferable.
• Capital can be raised more easily through the sale of stock.
• A corporation possesses centralized management.
What are the
disadvantages of
The primary disadvantage to a corporation is double

taxation. Profits of a corporation are taxed twice when
the profits are distributed to shareholders as
dividends. They are taxed first as income to the
corporation, then as income to the shareholder. All
reasonable business expenses such as salaries are
deductions against corporate income and can
minimize the double tax. Further, the double tax can
be eliminated by making an S corporation election.
Other disadvantages
• There is more complexity and
expense with forming a
• There is more extensive record
keeping requirements.
• Operating a corporation across
state lines often requires the
corporation to qualify to do
business in the other state.
Characteristics of a
Unlimited life
• As a corporation is owned by stockholders and managed by
employees, the sale of stock, death of a stockholder, or
inability of an employee to function does not impact the
continuous life of the corporation. Its charter may limit the
corporation's life although the corporation may continue if the
charter is extended.
Limited liability
• The liability of stockholders is limited to the amount each has
invested in the corporation. Personal assets of stockholders
are not available to creditors or lenders seeking payment of
amounts owed by the corporation. Creditors are limited to
corporate assets for satisfaction of their claims.
Separate legal entity
• The corporation is considered a separate legal entity,
conducting business in its own name. Therefore, corporations
may own property, enter into binding contracts, borrow
money, sue and be sued and pay taxes. Stockholders are
agents for the corporation only if they are also employees or
designated as agents.
Characteristics of a
• Relative ease of transferring ownership rights
• A person who buys stock in a corporation is called a stockholder
and receives a stock certificate indicating the number of shares
of the company she/he has purchased. Particularly in a public
company, the stock can be easily transferred in part or total at
the discretion of the stockholder. The stockholder wishing to
transfer (sell) stock does not require the approval of the other
stockholders to sell the stock. Similarly, a person or an entity
wishing to purchase stock in a corporation does not require the
approval of the corporation or its existing stockholders before
purchasing the stock. Once a public corporation sells its initial
offering of stock, it is not part of any subsequent transfers except
as a record keeper of share ownership. Privately held companies
may have some restrictions on the transfer of stock.
• Professional management
• Investors in a corporation need not actively manage the
business, as most corporations hire professional managers to
operate the business. The investors vote on the Board of
Directors who is responsible for hiring management.
Characteristics of a
Ease of capital acquisition
• A corporation can obtain capital by selling stock or bonds. This gives
a corporation a larger pool of resources because it is not limited to
the resources of a small number of individuals. The limited liability
and ease of transferring ownership rights makes it easier for a
corporation to acquire capital by selling stock, and the size of the
corporation allows it to issue bonds based on its name.
Government regulations
• The sale of stock results in government regulation to protect
stockholders, the owners of the corporation. State laws usually
include the requirements for issuing stock and distributions to
• Stockholders. The federal securities laws also govern the sale of
stock. Publicly held companies with stock traded on exchanges are
required to file their financial statements and additional informative
disclosures with the Securities and Exchange Commission. Certain
industries, such as banks, financial institutions, and gaming, are
also subject to regulations from other governmental agencies.