Sole Proprietorship

There are three principal forms of business organization:

1. the Sole Proprietorship,

2. the Partnership,

3. the Corporation.

The simplest form of business organization is the sole proprietorship, which is owned by one person. Many small businesses start out as sole proprietorships. The owner has relatively unlimited control over the business and keeps all the profits. These firms are usually owned by one person who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also have complete responsibility for any of its liabilities or debts. In case of breach of contract the business property and personal assets of the owner may be taken to pay judgments for damages awarded by courts.

Sole proprietorships are the most numerous form of business organization. No charter and permit are needed and there are no particular legal requirements for organizing or conducting a sole proprietorship. When started, many sole proprietorships are conducted out of the owner's home, garage, or van and inventory may be limited and may often be purchased on credit.

Advantages of a Sole Proprietorship:

1. Easiest and least expensive form of ownership to organize.

2. Sole proprietors are in complete control of business, and within the law, may make any decisions.

3. Sole proprietors receive all income from the business to keep or reinvest.

4. Profits from the business flow-through directly to the owner's personal tax return.

5. The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

1. Sole proprietors have unlimited liability and are legally responsible for all debts agamst the business. Their business and personal assets are at risk.

2. Sole proprietors may be at a disadvantage in raising funds and are often limited to using funds from personal savings.

3. Sole proprietors may have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.

Main Features of a Sole Proprietorship:

(+) Easy to organize

(+) Owner has complete control

(+) Owner receives all income

(-) Owner has unlimited liability

(-) Benefits are not business deductions

Answer the questions:

1. What are the three principal forms of business organization?

2. What is a sole proprietorship?.

3. What are the advantages and disadvantages of sole proprietorship?

Partnership

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners. The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed.

Many partnerships split up at crisis times. They also must decide up front how much time and capital each will contribute, etc.

Advantages of a Partnership

1. Partnerships are relatively easy to establish; however partners should develop the partnership agreement.

2. With more than one owner, the ability to raise funds may be increased.

3. The profits from the business flow directly through to the partners' personal tax returns.

4. Prospective employees may be attracted to the business if given the incentive to become a partner.

5. The business usually will benefit from partners who have complementary work skills.

Disadvantages of a Partnership

1. Partners are jointly and individually liable for the actions of the other partners.

2. Profits must be shared with others.

3. Since decisions are shared, disagreements can occur.

4. The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

There exist different types of Partnerships:

1. General Partnership

Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement. Equal shares are assumed unless there is a written agreement that states differently.

2. Limited Partnership and Partnership with limited liability

"Limited" means that most of the partners have limited liability (to the extent of their investment) as well as limited management decisions, which generally encourages investors for short term projects, or for investing in capital assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a general partnership.

3. Joint Venture

Joint Venture acts like a general partnership, but it is formed for a limited period of time or a single project. If the partners in a joint venture repeat the activity, they will be recognized as a continuing partnership and distribute accumulated partnership assets upon dissolution of the entity.

Main Features of a Partnership:

(+) Easy to organize, but needs agreement

(+) Partners receive all income

(-) Partners have unlimited liability

(-) Partners may disagree

(-) Life of business may be limited

Answer the questions:

1. What is a partnership?

2. What are the limited partnership and general partnership?

3. What are the advantages and disadvantages of partnership?

4. What is a joint venture?