1. Sole Proprietorship Chapter 12: Sole Prop., Partnerships, Corporations

2. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Sole Proprietorship Section 27.2 The Partnership 27 Chapter Sole Proprietorship and Partnership

3. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership What You’ll Learn How to define sole proprietorship (p. 584) How to create a sole proprietorship (p. 584)

4. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership What You’ll Learn How to identify the advantages of a sole proprietorship (p. 585) How to identify the disadvantages of a sole proprietorship (p. 587)

5. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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.

6. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Legal Terms sole proprietorship (p. 584) fictitious name (p. 584) employer identification number (p. 585) unlimited liability (p. 587)

7. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Creation and Operation of a Sole Proprietorship Advantages of a Sole Proprietorship Disadvantages of a Sole Proprietorship Section Outline

8. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is a sole proprietorship?

9. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Creation and Operation of a Sole Proprietorship

10. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership A sole proprietorship is the most common type of business and the easiest to form. Examples include: Creation and Operation of a Sole Proprietorship Repair shops Small retail stores Service organizations

11. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Creation and Operation of a Sole Proprietorship

12. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership If a sole proprietor uses anything but his or her own name, the law calls the made-up name a fictitious name. Creation and Operation of a Sole Proprietorship

13. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership In selecting a fictitious name, sole proprietors must not choose a company name already in use. Creation and Operation of a Sole Proprietorship

14. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership There usually are few formal requirements in establishing a sole proprietorship. Creation and Operation of a Sole Proprietorship

15. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Some may be required to have Creation and Operation of a Sole Proprietorship Licenses to legally operate as businesses Occupational licenses Certain types of liability insurance

16. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Some states require a formal filing when a sole proprietorship begins or if the sole proprietorship chooses to use a fictitious name. Creation and Operation of a Sole Proprietorship

17. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Ease of creation Total control Retention of profits Freedom from excessive governmental control One-time taxation of profits Advantages of a Sole Proprietorship

18. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Ease of Creation 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.

19. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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.

20. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Total Control 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.

21. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Retention of Profits Sole proprietors get to keep all of the profits that the firm makes. They must, of course, pay taxes on those profits.

22. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Freedom from Excessive Governmental Control 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.

23. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership One-Time Taxation of Profits 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.

24. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Disadvantages of a Sole Proprietorship Limited capital Unlimited liability Limited human resources Limited lifetime

25. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Limited Capital All money used to finance the business must come from the proprietor’s savings or income, or from loans obtained by the proprietor.

26. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Unlimited Liability Unlimited liability means that the business owner is responsible for all losses experienced by the business.

27. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Limited Human Resources 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.

28. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Limited Lifetime 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.

29. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Amira wants to start her own business. She really doesn’t like the idea of working for someone else— she wants work to suit her own schedule and she has very definite ideas about how a business should be run.

30. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Her idea is to open a slushee and fruit juice stand near the city park. However, she estimates the stand will cost about $7,500 to open and she has only saved $4,000.

31. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Given Amira’s circumstances, name one advantage Amira would find to having a sole proprietorship. Name one disadvantage.

32. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership ANSWER Advantage—total control; disadvantage—limited capital.

33. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 1. 1.What is a sole proprietorship? Section 27.1 Assessment

34. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned A form of business that is owned and operated by one person. Section 27.1 Assessment Answer

35. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 2. 2.How does a sole proprietorship begin? Section 27.1 Assessment

36. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned To create a sole proprietorship, a person needs only to begin the operation of the business. Section 27.1 Assessment Answer

37. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 3. 3.What are the advantages of a sole proprietorship? Section 27.1 Assessment

38. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned Ease of creation, total control, retention of profits, freedom from excessive governmental control, and one-time taxation of profits. Section 27.1 Assessment Answer

39. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 4. 4.What are the disadvantages of a sole proprietorship? Section 27.1 Assessment

40. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned Limited capital, unlimited liability, limited human resources, and limited lifetime. Section 27.1 Assessment Answer

41. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Assessment Critical Thinking Activity Licensing Requirements Why does the government interfere in the formation and regulation of some sole proprietorships by creating licensing requirements?

42. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Assessment Critical Thinking Activity Answer Licensing Requirements Answers will vary but could recognize that licensing requirements may be necessary for public safety.

43. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Assessment Legal Skills in Action The Responsibilities of a Sole Proprietor Your Aunt Matilda, a sole proprietor, owns a store called Scrapbook Heaven. She has decided to hire you and your friend Ted to work in the store on the weekends.

44. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Assessment Legal Skills in Action The Responsibilities of a Sole Proprietor Aunt Matilda is convinced that hiring you and Ted will not involve any new entanglement with the government.

45. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Assessment Legal Skills in Action The Responsibilities of a Sole Proprietor Send Aunt Matilda an e-mail message that explains the responsibilities of a sole proprietor who hires additional workers.

46. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 27.1 Assessment Legal Skills in Action Answer The Responsibilities of a Sole Proprietor E-mails will vary, but should include that once Aunt Matilda hires you and Ted, she will have to contact the Internal Revenue Service to obtain employer identification numbers.

47. Sole Proprietorship End of Section 27.1

48. Sole Proprietorship Section 27.2

49. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership What You’ll Learn How to define general partnership (p. 588) How to identify the ways that a partnership can be created (p. 588)

50. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership What You’ll Learn How to identify partnership rights in relation to property (p. 593) How to explain the effects of the dissolution of a partnership (p. 597)

51. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Why It’s Important Understanding the nature of a partnership will help you decide when to form that type of business association.

52. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Legal Terms general partnership (p. 588) articles of partnership (p. 588) partnership by proof of existence (p. 590) partnership by estoppel (p. 591) tenancy in partnership (p. 593)

53. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Legal Terms joint liability (p. 596) dissolution (p. 597) registered limited liability partnership (p. 598) limited partnership (p. 599)

54. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The Nature of Partnership Forming a General Partnership Types of Partners Partnership Property Property Rights of Partners Duties of the Partners Liability of the Partners Section Outline

55. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Dissolving a Partnership Effects of Dissolution Distribution of Assets Section Outline

56. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The Revised Uniform Partnership Act Registered Limited Liability Partnerships Limited Partnerships Section Outline

57. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is a partnership?

58. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Partnership law is largely found in the Uniform Partnership Act (UPA). The UPA defines partnership as “an association of two or more persons to carry on a business for profit.” The Nature of Partnership

59. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership More capital and credit available. Burden of work is shared. Responsibility for losses shared. Advantages of Partnerships

60. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Disadvantages of Partnerships

61. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and 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. Forming a General Partnership

62. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership General partnerships can be formed in one of three ways: Forming a General Partnership 1.By agreement 2.By proof of existence 3.By estoppel

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

64. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. By Agreement

65. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. By Agreement

66. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The partnership agreement is known as the articles of partnership, or as the articles of copartnership. By Agreement

67. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Parties to the agreement Specific nature, scope, and limits of the business Planned duration of the business Important Points Covered in an Agreement

68. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Amount of each partner’s original investment and procedure for future investments Provisions regarding salaries, withdrawal of funds, and the division of profits Important Points Covered in an Agreement

69. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Terms under which a partner may withdraw from the partnership Important Points Covered in an Agreement

70. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Sometimes a partnership can be formed because of the way that two or more people conduct their business together. By Proof of Existence

71. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. By Proof of Existence

72. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. By Estoppel

73. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. By Estoppel

74. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership There are five types of partners: Types of Partners 1.General 2.Secret 3.Silent 4.Dormant 5.Limited

75. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Each of these partners is a co-owner of the business and has some liability for the debts of the firm. Types of Partners

76. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 27.2 Types of Partners Type of PartnerParticipation in the Business Relationship to the Public Degree of Liability GeneralActiveKnownUnlimited SecretActiveUnknownUnlimited SilentNot activeKnownUnlimited DormantNot activeUnknownUnlimited LimitedNot activeKnownLimited

77. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership It is important to distinguish between property that belongs to the partnership and property that belongs to individual partners. Partnership Property

78. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Is property contributed directly to the partnership when the partnership is created. Is property that is bought with partnership funds. Partnership Property

79. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership In addition, the court may ask certain questions to determine whether or not certain property belongs to the partnership. Partnership Property

80. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Certain rights arise regarding property that belongs to the partnership. These include: Property Rights of the Partners The right to use the property The right to manage the firm The right to share in the profits

81. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Right to Use Property

82. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Right to Use Property

83. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Unless a partner’s rights are limited in the partnership agreement, each partner has an equal voice in managing the partnership’s business. Right to Manage the Firm

84. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Right to Share in the Profits

85. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Partners must trust one another. Each partner is an agent of the other partner and has duties comparable to those of an agent. Duties to the Partners

86. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 1.To always act in good faith and in the best interests of the firm. Duties to the Partners

87. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 2.To always use their best skill and judgment in looking after the firm’s affairs. Duties to the Partners

88. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 3.To be loyal to the firm and put the firm’s interests first. Duties to the Partners

89. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Liability of the Partners

90. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Liability of the Partners

91. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Liability of the Partners

92. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Liability of the Partners

93. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question How do partnerships come to an end?

94. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and 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. Dissolving a Partnership

95. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Dissolution does not necessarily bring the business to an end. Other partners may want to continue in business together. Effects of Dissolution

96. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership If so, Effects of Dissolution New financial arrangements need to be made. A new agreement must be drawn up.

97. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Public notice is usually given to relieve retiring partners from liability for any new debts. Effects of Dissolution

98. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Upon dissolution, an accounting of the firm’s financial affairs is necessary to determine how the firm’s assets will be distributed or divided. Distribution of Assets

99. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Liabilities are paid in this order: Distribution of Assets 1.Money owed to creditors other than partners. 2.Money lent by partners to the firm.

100. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 3.The original money paid into the partnership by each partner. 4.The surplus, if any, owed to the partners. Distribution of Assets

101. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership If the business is insolvent: Distribution of Assets Assets are sold to pay the creditors. Partners are individually liable for any unpaid balance that the sale of the assets will not cover.

102. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership When Jess and Joe’s Café closed, they had $38,000 and owed $25,000 to creditors. Neither Jess nor Joe had any outstanding loans to the business, but each had paid $5,000 into the business to start it.

103. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Will Jess and Joe get their money back? Will there be any additional money left over?

104. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership ANSWER Yes, Jess and Joe will get their money back. There will $3,000 left over. $38,000 – 25,000 = 13,000 –10,000 = $3,000.

105. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is the Revised Uniform Partnership Act?

106. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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). The Revised Uniform Partnership Act

107. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is a registered limited liability partnership?

108. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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. Registered Limited Liability Partnerships

109. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 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

110. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is a limited partnership?

111. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and 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.” Limited Partnership

112. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Limited partnerships are often used in real estate ventures and tax shelter investments. Limited Partnership

113. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 1. 1.What is a general partnership? Section 27.2 Assessment

114. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned An association of two or more persons to carry on a business for profit. Section 27.2 Assessment Answer

115. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 2. 2.How can a partnership be created? Section 27.2 Assessment

116. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned By agreement, by proof of existence, and by estoppel. Section 27.2 Assessment Answer

117. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 3. 3.What are the partner’s rights in relation to property? Section 27.2 Assessment

118. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned The right to use partnership property, the right to manage the firm, and the right to share profits. Section 27.2 Assessment Answer

119. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 4. 4.What are the effects of the dissolution of a partnership? Section 27.2 Assessment

120. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned Dissolution need not end a partnership. Other partners may wish to continue the business. Section 27.2 Assessment Answer

121. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned New financial arrangements must be made in regard to the new firm. A new agreement must be drawn up regarding the conduct of the new firm. Section 27.2 Assessment Answer

122. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned Public notice must usually be given in order to relieve the retiring partners from liability for any new debts created by the new firm. Section 27.2 Assessment Answer

123. Sole Proprietorship End of Section 27.2

124. Sole Proprietorship Section 28.1

125. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership What You’ll Learn How to define corporation (p. 606) How to distinguish among various types of corporations (p. 607) How to create a corporation (p. 608)

126. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership What You’ll Learn How to finance a corporation (p. 614) How to distinguish between a corporation and a limited liability company (p. 616)

127. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Why It’s Important Understanding the nature of a corporation will help you decide when to form one rather than the other associations that are available.

128. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Legal Terms corporation (p. 606) shareholder (p. 606) share (p. 606) promoter (p. 608) articles of incorporation (p. 610)

129. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Legal Terms certificate of incorporation (p. 612) common stock (p. 614) dividends (p. 614) preferred stock (p. 614) limited liability company (p. 616)

130. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The Nature of a Corporation Advantages of a Corporation Disadvantages of a Corporation Types of Corporations Section Outline

131. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Forming a Corporation The Incorporation Process Corporate Financing Section Outline Forming a Limited Liability Company

132. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Incorporation Problems De Facto Corporation Corporation by Estoppel Piercing the Corporate Veil Section Outline

133. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is a corporation?

134. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership A corporation is a body formed and authorized by law to act as a single person, distinct from its members or owners. The Nature of a Corporation

135. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership About 90 percent of all business in the United States is done by corporations. Not all corporations are large businesses. Approximately 40 percent of all corporations employ fewer than five employees. The Nature of a Corporation

136. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership An individual who owns shares of a corporation is called a shareholder or a stockholder. A share is a single unit of ownership of a corporation. The Nature of a Corporation

137. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Each shareholder has one vote for each share of stock that he or she owns. Shareholders cast their votes to elect a board of directors whose duty is to direct the corporation’s business. The Nature of a Corporation

138. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Selling shares enables a corporation to tap into a large source of capital. Shareholder’s liability is limited to the amount of money he or she paid for shares in the corporation. Advantages of a Corporation

139. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership It is a legal entity and has the power to make contracts, buy and sell goods, and sue and be sued. It has continuity of existence, regardless of the lifespans of founders, shareholders, and directors. Advantages of a Corporation

140. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership A corporation’s income may be taxed more than once. First as the company profits; then shareholders’ dividends become part of their taxable income. Large corporations face extensive government regulation. Disadvantages of a Corporation

141. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Original founders can lose not only control but also actual ownership. Because of the prominence of some corporations, business decisions may be subject to close scrutiny. Disadvantages of a Corporation

142. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 28.1 Types of Corporations

143. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question How is a corporation formed?

144. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Each state has its own version of corporate law. States may use: Forming a Corporation The Model Business Corporation Act (MBCA) The Revised Model Business Corporation Act (RMBCA) Their own statutes

145. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 1.A promoter carries out the incorporation process by taking the initial steps to organize and finance a business. 2.Promoters choose a corporate name. The Incorporation Process

146. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 3.Promoters are responsible for drawing up and filing the articles of incorporation, an application for incorporation of a business that describes a corporation’s organization, powers, and authority. The Incorporation Process

147. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 4.A filing fee completes the application. The Incorporation Process

148. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 5.After the application is approved by the secretary of state, the corporation receives a certificate of incorporation, its official authorization to do business in the state (also called a charter). The Incorporation Process

149. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership 6.Initial shareholders elect a board of directors who replace the original incorporators. 7.Directors elect a chairman and top corporate officers to manage the company. The Incorporation Process

150. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The articles of incorporation usually include the following information: Articles of Incorporation Name of the corporation, including the words company, incorporated, or corporation or appropriate abbreviations.

151. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Proposed duration of the corporation. Purpose(s) of the corporation. Number, classes, and value of corporate shares. Articles of Incorporation

152. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Shareholders’ rights in relation to shares, classes of shares, and special shares. Address of the original registered or statutory agent. Articles of Incorporation

153. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Names and signature of the initial directors. Names and signatures of the incorporators. Articles of Incorporation

154. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership A corporation may choose to issue several different kinds of stock. Along with each share of stock come certain rights. Corporate Financing

155. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Common stock is the basic form of corporation ownership. Types of Stock Owners have voting rights. It pays dividends, or profits, to the shareholders based on the corporation’s performance.

156. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Preferred stock is the second type of stock issued by a corporation. Types of Stock Owners have no voting rights. But do receive a fixed dividend. Preferred stock dividends are paid before common stock dividends.

157. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Draw a flow chart that describes the relationship between the following people. Board of directors Initial shareholders Chairperson Top corporate officers

158. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership ANSWER Initial shareholders hire board of directors who elect the chairperson and top corporate officers.

159. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question What is a limited liability company?

160. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership A limited liability company (LLC) is a new type of business enterprise that has been adopted by all states. It is a combination of a partnership and a corporation. Forming a Limited Liability Company

161. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership LLCs offer limited liability to its owners. Like the partners in a partnership, the owners of an LLC escape double taxation. Forming a Limited Liability Company

162. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership LLCs are statutory entities—they can be formed only if owners follow the legal steps required—and must also have a statutory agent for service of process. Forming a Limited Liability Company

163. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Pre-Learning Question How does the law deal with incorporation problems?

164. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The courts have developed two doctrines—de facto corporations and corporation by estoppel—to deal with incorporation problems. Incorporation Problems

165. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Even when making a good faith attempt to incorporate, promoters sometimes inadvertently make an error in filing, or fail to complete the incorporation. De Facto Corporation

166. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership The laws says that, although the corporation does not exist in law (de jure), it does exist in fact (de facto). This type of corporation is called a de facto corporation. De Facto Corporation

167. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Like other estoppel doctrines, corporation by estoppel stops people from denying the consequences of their own actions. Corporation by Estoppel

168. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Corporation by estoppel usually occurs when some party has been willing to treat a person or a group of people as a corporation, generally reaping some benefit from the relationship. Corporation by Estoppel

169. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership When this happens, the court will not allow that party to then deny the existence of the corporation because doing so would be unfair. Corporation by Estoppel

170. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Sometimes there are extreme circumstances in which the courts will deny shareholders the benefits of limited liability and hold them personally liable. This is known as piercing the corporate veil. Piercing the Corporate Veil

171. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 1. 1.What is a corporation? Who are its owners? Section 28.1 Assessment

172. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned An artificial person created by law owned by shareholders or stockholders. Section 28.1 Assessment Answer

173. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 2. 2.What are the two main types of corporations? Section 28.1 Assessment

174. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned Public and private. Section 28.1 Assessment Answer

175. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 3. 3.What are the steps necessary to form a corporation? Section 28.1 Assessment

176. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned Promoters choose a corporate name, draw up and file articles of incorporation with the office of the secretary of state, pay the filing fee, and receive the certificate of incorporation; Section 28.1 Assessment Answer

177. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned initial shareholders elect a board of directors; and directors elect a chairman and top officers to manage the corporation. Section 28.1 Assessment Answer

178. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 4. 4.How are corporations financed? Section 28.1 Assessment

179. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned By selling shares of stock in the corporation. Section 28.1 Assessment Answer

180. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned 5. 5.What is the difference between a corporation and a limited liability company? Section 28.1 Assessment

181. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Reviewing What You Learned A limited liability company is a combination of a partnership and a corporation. Like a corporation, it offers limited liability to its owners. Like a partnership, the owners escape double taxation. Section 28.1 Assessment Answer

182. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 28.1 Assessment Critical Thinking Activity Advantages and Disadvantages of a Corporation If you had a chain of very successful restaurants in a large city, why might you decide to incorporate the business? Why might you decide not to incorporate?

183. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 28.1 Assessment Critical Thinking Activity Answer Advantages and Disadvantages of a Corporation Answers will vary, but could include raising capital for further expansion as an advantage and additional government regulation as a disadvantage.

184. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 28.1 Assessment Legal Skills in Action Forming a Corporation Your brother, Dirk, wants to start a business manufacturing playground equipment using recyclable materials, such as plastics and old tires.

185. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 28.1 Assessment Legal Skills in Action Forming a Corporation He wants to organize his company as a corporation in order to raise capital to build his manufacturing plant, but he isn’t sure how to go about it.

186. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 28.1 Assessment Legal Skills in Action Forming a Corporation Write a letter to Dirk outlining the steps he should take to incorporate his business.

187. Understanding Business and Personal Law Sole Proprietorship Section 27.1 Sole Proprietorship and Partnership Section 28.1 Assessment Legal Skills in Action Answer Forming a Corporation Letters will vary, but should include contacting the secretary of state’s office in Dirk’s state.

188. Sole Proprietorship End of Section 28.1