Sole Proprietorship and Partnership Basics

Study Notes

Sole Proprietorship

A sole proprietorship is a business owned and run by one person.
No legal distinction between the owner and the business.
Simplicity and ease of setup - minimal paperwork is required.
Owner is personally liable for all business debts and obligations.
Profits are taxed as personal income of the owner.
Limited access to capital compared to other business structures.
Limited life - the business ceases to exist if the owner dies or decides to stop running it.

Partnership

A partnership is a business owned and run by two or more people.
Partners share in the profits and losses of the business.
Typically formalized by a partnership agreement.
The agreement outlines responsibilities, profit-sharing, decision-making procedures, and dispute resolution strategies.
Similar to sole proprietorships, partners are typically personally liable for business debts (unless otherwise specified in the agreement).
Profits are taxed as personal income of the partners.
More complex setup than a sole proprietorship, requiring agreement documentation.
Limited life, as with sole proprietorships, potentially ending with a partner's withdrawal or death.

Limited Liability Company (LLC)

An LLC combines the limited liability aspects of a corporation with the tax benefits of a partnership or sole proprietorship.
Owners, called members, are not personally liable for business debts.
Liability is limited to the amount of their investment in the company.
Flexibility in management structure, choosing between member-managed or manager-managed.
Profits passed through to owners' personal income, avoiding double taxation.
More complex setup than partnerships or sole proprietorships, often requiring incorporation documents and legal advice.
Regulations and requirements for LLC establishment vary by jurisdiction.

Corporation

A corporation is a separate legal entity from its owners.
Offers limited liability for shareholders.
Shareholders' liability is limited to the amount they invested.
More complex setup than other business structures, typically requiring a charter and other legal documentation.
Usually more complicated to manage than an LLC or Partnership.
Double taxation - corporate profits are taxed, and dividends paid to shareholders are also taxed.
Ability to raise capital more easily through the sale of stock.
More complex from a regulatory perspective, with ongoing compliance requirements.

Choosing a Business Structure

Factors to consider when choosing a business structure:
- Liability concerns
- Tax implications
- Management structure
- Capital raising needs
- Regulatory requirements
Consulting with legal and financial professionals is highly recommended.

Description

Explore the fundamentals of sole proprietorships and partnerships in this quiz. Understand the key characteristics, advantages, and disadvantages of each business structure. Learn about liability, taxation, and the importance of partnership agreements.