Section 27.1 Sole Proprietorship

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2 Chapter Sole Sole 27 Proprietorship Proprietorship and Partnership Section 27.1 Section 27.2 The Partnership and Partnership

3 Why It s Important Understanding the nature of a sole proprietorship will help you decide when to form that type of business association rather than the other associations that are available in the market today. and Partnership

4 Creation and Operation of a A sole proprietorship is a form of business that is owned and operated by one person. However, that owner may have any number of agents or employees. and Partnership

5 Creation and Operation of a NOTES: A sole proprietorship is the most common type of business and the easiest to form. Examples include: repair shops small retail stores service organizations and Partnership

6 Creation and Operation of a NOTES: A person who goes into business as a sole proprietor can choose to operate under his or her own name or can make up a name. and Partnership

7 Creation and Operation of a If a sole proprietor uses anything but his or her own name, the law calls the made-up name a fictitious name. and Partnership

8 Creation and Operation of a NOTES: In selecting a fictitious name, sole proprietors must not choose a company name already in use. and Partnership

9 Creation and Operation of a There usually are few formal requirements in establishing a sole proprietorship. and Partnership

10 Creation and Operation of a Some may be required to have licenses to legally operate as businesses occupational licenses certain types of liability insurance and Partnership

11 Creation and Operation of a NOTES: Some states require a formal filing when a sole proprietorship begins or if the sole proprietorship chooses to use a fictitious name. and Partnership

12 Advantages of a Sole Proprietorship ease of creation total control retention of profits freedom from excessive governmental control one-time taxation of profits and Partnership

13 Ease of Creation NOTES: A sole proprietorship is the easiest form of business association to form. To create a sole proprietorship, a person needs only to begin the operation of the business. and Partnership

14 Ease of Creation When a sole proprietor decides to hire workers, he or she will have to contact the Internal Revenue Service to obtain an employer identification number, which is assigned for income tax purposes. and Partnership

15 Total Control NOTES: In a sole proprietorship, while the sole proprietor is free to seek the advice of experts, such as accountants, attorneys, and financial planners, all decisions are up to the sole proprietor. and Partnership

16 Retention of Profits NOTES: Sole proprietors get to keep all of the profits that the firm makes. They must, of course, pay taxes on those profits. and Partnership

17 Freedom from Excessive Governmental Control NOTES: The regulations a sole proprietor must follow are much less cumbersome than the regulations required of other types of business ownership, such as limited partners and corporations. and Partnership

18 One-Time Taxation of Profits NOTES: Sole proprietorships do not pay taxes as a business. Rather, the individual sole proprietor who owns the business pays taxes based upon his or her income, which includes any profits made by the business. and Partnership

19 Disadvantages of a limited capital unlimited liability limited human resources limited lifetime and Partnership

20 Limited Capital NOTES: All money used to finance the business must come from the proprietor s savings or income, or from loans obtained by the proprietor. and Partnership

21 Unlimited Liability Unlimited liability means that the business owner is responsible for all losses experienced by the business. and Partnership

22 Limited Human Resources NOTES: As the only person responsible for the decisions that affect the business, a sole proprietor is subject to tremendous stress. Even if he or she consults experts, the decision-making responsibility still falls upon the owner. and Partnership

23 Limited Lifetime NOTES: Unlike a corporation, which has perpetual existence, a sole proprietorship lasts only as long as the proprietor. When the proprietor dies or sells or closes the business, the company no longer exists. End of Section 27.1 and Partnership

24 Section 27.2 Sole THE Proprietorship PARTNERSHIP

25 Why It s Important Understanding the nature of a partnership will help you decide when to form that type of business association. and Partnership

26 The Nature of Partnership Partnership law is largely found in the Uniform Partnership Act (UPA). NOTES: The UPA defines partnership as an association of two or more persons to carry on a business for profit. and Partnership

27 Advantages of Partnerships NOTES: more capital and credit available burden of work is shared responsibility for losses shared and Partnership

28 Disadvantages of Partnerships NOTES: partners share in the liabilities each partner is responsible for the others actions must share profits disagreements among partners death of a partner dissolves the partnership and Partnership

29 Forming a General Partnership When two or more competent parties combine their money, labor, and skills for the purpose of carrying on a lawful business, they create a general partnership. and Partnership

30 Forming a General Partnership General partnerships can be formed in one of three ways: 1. by agreement 2. by proof of existence 3. by estoppel and Partnership

31 27.2 Section 27.1 Partnership Formation Partnership by contract Express agreement drawn up by partners Articles of partnership Partnership by proof of existence Individuals form partnership because of their method of doing business Sharing of profits is prima facie evidence Partnership by estoppel Third party led to believe a partnership exists No true partnership created and Partnership

32 By Agreement NOTES: Forming a general partnership by agreement requires the valid assent of all parties. Such an agreement is usually express and may be written or oral. and Partnership

33 By Agreement NOTES: Under the Statue of Frauds, if a partnership is to last more than a year or if the partnership is formed to sell, buy, or lease real property, it must be evidenced in writing. and Partnership

34 By Agreement The partnership agreement is known as the articles of partnership, or as the articles of copartnership. and Partnership

35 Important Points Covered in an Agreement parties to the agreement specific nature, scope, and limits of the business planned duration of the business and Partnership

36 Important Points Covered in an Agreement amount of each partner s original investment and procedure for future investments provisions regarding salaries, withdrawal of funds, and the division of profits and Partnership

37 Important Points Covered in an Agreement terms under which a partner may withdraw from the partnership and Partnership

38 By Proof of Existence NOTES: Sometimes a partnership can be formed because of the way that two or more people conduct their business together. and Partnership

39 By Proof of Existence Such a partnership, which forms regardless of the label given to the enterprise or the intent of the parties involved, is termed a partnership by proof of existence. and Partnership

40 By Estoppel If someone does or says something that leads a third party to believe that a partnership exists, then a court may treat the arrangement as a partnership by estoppel. and Partnership

41 By Estoppel NOTES: This type of partnership is not a real partnership. It is a way for the court to prevent injustice because someone has relied on the words or actions of another party and has acted accordingly. and Partnership

42 Types of Partners There are five types of partners: 1. general 2. secret 3. silent 4. dormant 5. limited and Partnership

43 Types of Partners NOTES: Each of these partners is a co-owner of the business and has some liability for the debts of the firm. and Partnership

44 27.2 Section 27.1 Types of Partners Type of Partner Participation in the Business Relationship to the Public Degree of Liability General Active Known Unlimited Secret Active Unknown Unlimited Silent Not active Known Unlimited Dormant Not active Unknown Unlimited Limited Not active Known Limited and Partnership

45 Partnership Property NOTES: It is important to distinguish between property that belongs to the partnership and property that belongs to individual partners. and Partnership

46 Partnership Property is property contributed directly to the partnership when the partnership is created is property that is bought with partnership funds and Partnership

47 Partnership Property In addition, the court may ask certain questions to determine whether or not certain property belongs to the partnership. and Partnership

48 Property Rights of the Partners Certain rights arise regarding property that belongs to the partnership. These include the right to use the property the right to manage the firm the right to share in the profits and Partnership

49 Right to Use Property NOTES: Partners are co-owners of all the real and personal property included in the partnership. This co-ownership is called tenancy in partnership by the UPA. and Partnership

50 Right to Use Property As a result, the partners can use the property for partnership business; however, there are limitations. For example, a partner cannot, on his or her own, transfer ownership of the property. and Partnership

51 Right to Manage the Firm NOTES: Unless a partner s rights are limited in the partnership agreement, each partner has an equal voice in managing the partnership s business. and Partnership

52 Right to Share in the Profits NOTES: Unless there is an agreement to the contrary, partners share equally in the profits, regardless of their initial capital contribution or the time devoted by each partner to the business. and Partnership

53 Duties to the Partners NOTES: Partners must trust one another. Each partner is an agent of the other partner and has duties comparable to those of an agent. and Partnership

54 Duties to the Partners 1. To always act in good faith and in the best interests of the firm. and Partnership

55 Duties to the Partners 2. To always use their best skill and judgment in looking after the firm s affairs. and Partnership

56 Duties to the Partners 3. To be loyal to the firm and put the firm s interests first. and Partnership

57 Liability of the Partners NOTES: Partners have unlimited liability for all of the debts of the partnership incurred while they are partners, even to the extent of their personal assets. and Partnership

58 Liability of the Partners Partners are liable to other members of the firm for their share of the firm s debts. Partners share losses in the same proportion that they share profits. and Partnership

59 Liability of the Partners NOTES: Partners are jointly liable with their partners on contracts entered into by any member of the firm acting within the actual or apparent scope of the firm s business. and Partnership

60 Liability of the Partners Joint liability means that in the event of a lawsuit, all the partners must be sued together. Partners are jointly and severally (separately) liable for torts committed within the scope of the firm s business. and Partnership

61 Dissolving a Partnership A dissolution is a legal detachment. The dissolution of a partnership is a change in the relationship of the partners that occurs when any partner stops being associated with the business. and Partnership

62 Effects of Dissolution NOTES: Dissolution does not necessarily bring the business to an end. Other partners may want to continue in business together. and Partnership

63 Effects of Dissolution If so, new financial arrangements need to be made. a new agreement must be drawn up. and Partnership

64 Effects of Dissolution public notice is usually given to relieve retiring partners from liability for any new debts. and Partnership

65 Distribution of Assets NOTES: Upon dissolution, an accounting of the firm s financial affairs is necessary to determine how the firm s assets will be distributed or divided. and Partnership

66 Distribution of Assets Liabilities are paid in this order. 1. Money owed to creditors other than partners 2. Money lent by partners to the firm and Partnership

67 Distribution of Assets 3. The original money paid into the partnership by each partner 4. The surplus, if any, owed to the partners and Partnership

68 Distribution of Assets If the business is insolvent: Assets are sold to pay the creditors. Partners are individually liable for any unpaid balance that the sale of the assets will not cover. and Partnership

69 The Revised Uniform Partnership Act Since the UPA was written in 1914, it has undergone extensive revision. This new variation of the act is referred to as the Revised Uniform Partnership Act (RUPA). and Partnership

70 Registered Limited Liability Partnerships A registered limited liability partnership (RLLP) is a new type of partnership designed to eliminate a major disadvantage of the general partnership joint and several liability. and Partnership

71 NOTES: Partners of an RLLP can escape joint and several liability for the torts, wrongful acts, negligence, or misconduct of other partners by registering with the appropriate state office. Registered Limited Liability Partnerships and Partnership

72 Limited Partnership According to RUPA, a limited partnership is a partnership formed by two or more persons... having one or more general partners and one or more limited partners. and Partnership

73 Limited Partnership NOTES: Limited partnerships are often used in real estate ventures and tax shelter investments. End of Section 27.2 and Partnership

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