Title: Chapter 12: Sole Prop., Partnerships, Corporations
1Chapter 12 Sole Prop., Partnerships, Corporations
2Sole Proprietorship and Partnership
Chapter
27
Section 27.1 Sole Proprietorship Section
27.2 The Partnership
3What Youll Learn
- How to define sole proprietorship (p. 584)
- How to create a sole proprietorship (p. 584)
4What Youll Learn
- How to identify the advantages of a sole
proprietorship (p. 585) - How to identify the disadvantages of a sole
proprietorship (p. 587)
5Why Its 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.
6Legal Terms
- sole proprietorship (p. 584)
- fictitious name (p. 584)
- employer identification number (p. 585)
- unlimited liability (p. 587)
7Section Outline
Creation and Operation of a Sole Proprietorship
Advantages of a Sole Proprietorship Disadvantages
of a Sole Proprietorship
8Pre-Learning Question
What is a sole proprietorship?
9Creation and Operation of a Sole Proprietorship
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.
10Creation and Operation of a Sole Proprietorship
A sole proprietorship is the most common type of
business and the easiest to form. Examples
include
- Repair shops
- Small retail stores
- Service organizations
11Creation and Operation of a Sole Proprietorship
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.
12Creation and Operation of a Sole Proprietorship
If a sole proprietor uses anything but his or her
own name, the law calls the made-up name a
fictitious name.
13Creation and Operation of a Sole Proprietorship
In selecting a fictitious name, sole proprietors
must not choose a company name already in use.
14Creation and Operation of a Sole Proprietorship
There usually are few formal requirements in
establishing a sole proprietorship.
15Creation and Operation of a Sole Proprietorship
Some may be required to have
- Licenses to legally operate as businesses
- Occupational licenses
- Certain types of liability insurance
16Creation and Operation of a Sole Proprietorship
Some states require a formal filing when a sole
proprietorship begins or if the sole
proprietorship chooses to use a fictitious name.
17Advantages of a Sole Proprietorship
- Ease of creation
- Total control
- Retention of profits
- Freedom from excessive governmental control
- One-time taxation of profits
18Ease 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.
19Ease 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.
20Total 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.
21Retention of Profits
Sole proprietors get to keep all of the profits
that the firm makes. They must, of course, pay
taxes on those profits.
22Freedom 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.
23One-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.
24Disadvantages of a Sole Proprietorship
- Limited capital
- Unlimited liability
- Limited human resources
- Limited lifetime
25Limited Capital
All money used to finance the business must come
from the proprietors savings or income, or from
loans obtained by the proprietor.
26Unlimited Liability
Unlimited liability means that the business owner
is responsible for all losses experienced by the
business.
27Limited 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.
28Limited 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.
29Amira wants to start her own business. She really
doesnt like the idea of working for someone
elseshe wants work to suit her own schedule and
she has very definite ideas about how a business
should be run.
30Her 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.
31Given Amiras circumstances, name one advantage
Amira would find to having a sole proprietorship.
Name one disadvantage.
32ANSWER
Advantagetotal control disadvantagelimited
capital.
33Section 27.1 Assessment
Reviewing What You Learned
- What is a sole proprietorship?
34Section 27.1 Assessment
Reviewing What You Learned
Answer
A form of business that is owned and operated by
one person.
35Section 27.1 Assessment
Reviewing What You Learned
- How does a sole proprietorship begin?
36Section 27.1 Assessment
Reviewing What You Learned
Answer
To create a sole proprietorship, a person needs
only to begin the operation of the business.
37Section 27.1 Assessment
Reviewing What You Learned
- What are the advantages of a sole proprietorship?
38Section 27.1 Assessment
Reviewing What You Learned
Answer
Ease of creation, total control, retention of
profits, freedom from excessive governmental
control, and one-time taxation of profits.
39Section 27.1 Assessment
Reviewing What You Learned
- What are the disadvantages of a sole
proprietorship?
40Section 27.1 Assessment
Reviewing What You Learned
Answer
Limited capital, unlimited liability, limited
human resources, and limited lifetime.
41Section 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?
42Section 27.1 Assessment
Critical Thinking Activity Answer Licensing
Requirements
Answers will vary but could recognize that
licensing requirements may be necessary for
public safety.
43Section 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.
44Section 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.
45Section 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.
46Section 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.
47End of Section 27.1
48Section 27.2
49What Youll Learn
- How to define general partnership (p. 588)
- How to identify the ways that a partnership can
be created (p. 588)
50What Youll 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)
51Why Its Important
Understanding the nature of a partnership will
help you decide when to form that type of
business association.
52Legal 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)
53Legal Terms
- joint liability (p. 596)
- dissolution (p. 597)
- registered limited liability partnership
- (p. 598)
- limited partnership (p. 599)
54Section Outline
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
55Section Outline
Dissolving a Partnership
Effects of Dissolution Distribution of Assets
56Section Outline
The Revised Uniform Partnership Act Registered
Limited Liability Partnerships Limited
Partnerships
57Pre-Learning Question
What is a partnership?
58The Nature of 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.
59Advantages of Partnerships
- More capital and credit available.
- Burden of work is shared.
- Responsibility for losses shared.
60Disadvantages of Partnerships
- 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.
61Forming 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.
62Forming a General Partnership
General partnerships can be formed in one of
three ways
- By agreement
- By proof of existence
- By estoppel
6327.2
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
64By Agreement
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.
65By Agreement
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.
66By Agreement
The partnership agreement is known as the
articles of partnership, or as the articles of
copartnership.
67Important Points Covered in an Agreement
- Parties to the agreement
- Specific nature, scope, and limits of the
business - Planned duration of the business
68Important Points Covered in an Agreement
- Amount of each partners original investment and
procedure for future investments - Provisions regarding salaries, withdrawal of
funds, and the division of profits
69Important Points Covered in an Agreement
- Terms under which a partner may withdraw from the
partnership
70By Proof of Existence
Sometimes a partnership can be formed because of
the way that two or more people conduct their
business together.
71By 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.
72By 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.
73By Estoppel
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.
74Types of Partners
There are five types of partners
- General
- Secret
- Silent
- Dormant
- Limited
75Types of Partners
Each of these partners is a co-owner of the
business and has some liability for the debts of
the firm.
7627.2
Types of Partners
77Partnership Property
It is important to distinguish between property
that belongs to the partnership and property that
belongs to individual partners.
78Partnership Property
- Is property contributed directly to the
partnership when the partnership is created. - Is property that is bought with partnership funds.
79Partnership Property
In addition, the court may ask certain questions
to determine whether or not certain property
belongs to the partnership.
80Property 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
81Right to Use Property
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.
82Right 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.
83Right to Manage the Firm
Unless a partners rights are limited in the
partnership agreement, each partner has an equal
voice in managing the partnerships business.
84Right to Share in the Profits
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.
85Duties to the Partners
Partners must trust one another. Each partner
is an agent of the other partner and has duties
comparable to those of an agent.
86Duties to the Partners
- To always act in good faith and in the best
interests of the firm.
87Duties to the Partners
- To always use their best skill and judgment in
looking after the firms affairs.
88Duties to the Partners
- To be loyal to the firm and put the firms
interests first.
89Liability of the Partners
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.
90Liability of the Partners
- Partners are liable to other members of the firm
for their share of the firms debts. - Partners share losses in the same proportion that
they share profits.
91Liability of the Partners
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 firms business.
92Liability 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 firms business.
93Pre-Learning Question
How do partnerships come to an end?
94Dissolving 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.
95Effects of Dissolution
Dissolution does not necessarily bring the
business to an end. Other partners may want to
continue in business together.
96Effects of Dissolution
If so,
- New financial arrangements need to be made.
- A new agreement must be drawn up.
97Effects of Dissolution
- Public notice is usually given to relieve
retiring partners from liability for any new
debts.
98Distribution of Assets
Upon dissolution, an accounting of the firms
financial affairs is necessary to determine how
the firms assets will be distributed or divided.
99Distribution of Assets
Liabilities are paid in this order
- Money owed to creditors other than partners.
- Money lent by partners to the firm.
100Distribution of Assets
- The original money paid into the partnership by
each partner. - The surplus, if any, owed to the partners.
101Distribution 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.
102When Jess and Joes 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.
103Will Jess and Joe get their money back? Will
there be any additional money left over?
104ANSWER
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.
105Pre-Learning Question
What is the Revised Uniform Partnership Act?
106The 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).
107Pre-Learning Question
What is a registered limited liability
partnership?
108Registered Limited Liability Partnerships
A registered limited liability partnership (RLLP)
is a new type of partnership designed to
eliminate a major disadvantage of the general
partnershipjoint and several liability.
109Registered Limited Liability Partnerships
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.
110Pre-Learning Question
What is a limited partnership?
111Limited 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.
112Limited Partnership
Limited partnerships are often used in real
estate ventures and tax shelter investments.
113Section 27.2 Assessment
Reviewing What You Learned
- What is a general partnership?
114Section 27.2 Assessment
Reviewing What You Learned
Answer
An association of two or more persons to carry on
a business for profit.
115Section 27.2 Assessment
Reviewing What You Learned
- How can a partnership be created?
116Section 27.2 Assessment
Reviewing What You Learned
Answer
By agreement, by proof of existence, and by
estoppel.
117Section 27.2 Assessment
Reviewing What You Learned
- What are the partners rights in relation to
property?
118Section 27.2 Assessment
Reviewing What You Learned
Answer
The right to use partnership property, the right
to manage the firm, and the right to share
profits.
119Section 27.2 Assessment
Reviewing What You Learned
- What are the effects of the dissolution of a
partnership?
120Section 27.2 Assessment
Reviewing What You Learned
Answer
Dissolution need not end a partnership. Other
partners may wish to continue the business.
121Section 27.2 Assessment
Reviewing What You Learned
Answer
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.
122Section 27.2 Assessment
Reviewing What You Learned
Answer
Public notice must usually be given in order to
relieve the retiring partners from liability for
any new debts created by the new firm.
123End of Section 27.2
124Section 28.1
125What Youll Learn
- How to define corporation (p. 606)
- How to distinguish among various types of
corporations (p. 607) - How to create a corporation (p. 608)
126What Youll Learn
- How to finance a corporation (p. 614)
- How to distinguish between a corporation and a
limited liability company (p. 616)
127Why Its Important
Understanding the nature of a corporation will
help you decide when to form one rather than the
other associations that are available.
128Legal Terms
- corporation (p. 606)
- shareholder (p. 606)
- share (p. 606)
- promoter (p. 608)
- articles of incorporation (p. 610)
129Legal Terms
- certificate of incorporation (p. 612)
- common stock (p. 614)
- dividends (p. 614)
- preferred stock (p. 614)
- limited liability company (p. 616)
130Section Outline
The Nature of a Corporation
Advantages of a Corporation Disadvantages of a
Corporation Types of Corporations
131Section Outline
Forming a Corporation
The Incorporation Process Corporate Financing
Forming a Limited Liability Company
132Section Outline
Incorporation Problems
De Facto Corporation Corporation by
Estoppel Piercing the Corporate Veil
133Pre-Learning Question
What is a corporation?
134The Nature of a Corporation
A corporation is a body formed and authorized by
law to act as a single person, distinct from its
members or owners.
135The Nature of a Corporation
- 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.
136The Nature of a Corporation
- 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.
137The Nature of a Corporation
- 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
corporations business.
138Advantages of a Corporation
- Selling shares enables a corporation to tap into
a large source of capital. - Shareholders liability is limited to the amount
of money he or she paid for shares in the
corporation.
139Advantages of a Corporation
- 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.
140Disadvantages of a Corporation
- A corporations 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.
141Disadvantages of a Corporation
- 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.
14228.1
Types of Corporations
143Pre-Learning Question
How is a corporation formed?
144Forming a Corporation
Each state has its own version of corporate law.
States may use
- The Model Business Corporation Act (MBCA)
- The Revised Model Business Corporation Act
(RMBCA) - Their own statutes
145The Incorporation Process
- A promoter carries out the incorporation process
by taking the initial steps to organize and
finance a business. - Promoters choose a corporate name.
146The Incorporation Process
- Promoters are responsible for drawing up and
filing the articles of incorporation, an
application for incorporation of a business that
describes a corporations organization, powers,
and authority.
147The Incorporation Process
- A filing fee completes the application.
148The Incorporation Process
- 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).
149The Incorporation Process
- Initial shareholders elect a board of directors
who replace the original incorporators. - Directors elect a chairman and top corporate
officers to manage the company.
150Articles of Incorporation
The articles of incorporation usually include the
following information
- Name of the corporation, including the words
company, incorporated, or corporation or
appropriate abbreviations.
151Articles of Incorporation
- Proposed duration of the corporation.
- Purpose(s) of the corporation.
- Number, classes, and value of corporate shares.
152Articles of Incorporation
- Shareholders rights in relation to shares,
classes of shares, and special shares. - Address of the original registered or statutory
agent.
153Articles of Incorporation
- Names and signature of the initial directors.
- Names and signatures of the incorporators.
154Corporate Financing
A corporation may choose to issue several
different kinds of stock. Along with each share
of stock come certain rights.
155Types of Stock
Common stock is the basic form of corporation
ownership.
- Owners have voting rights.
- It pays dividends, or profits, to the
shareholders based on the corporations
performance.
156Types of Stock
Preferred stock is the second type of stock
issued by a corporation.
- Owners have no voting rights.
- But do receive a fixed dividend.
- Preferred stock dividends are paid before common
stock dividends.
157Draw a flow chart that describes the relationship
between the following people.
- Board of directors
- Initial shareholders
- Chairperson
- Top corporate officers
158ANSWER
Initial shareholders hire board of directors who
elect the chairperson and top corporate officers.
159Pre-Learning Question
What is a limited liability company?
160Forming a Limited Liability Company
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.
161Forming a Limited Liability Company
- LLCs offer limited liability to its owners.
- Like the partners in a partnership, the owners of
an LLC escape double taxation.
162Forming a Limited Liability Company
LLCs are statutory entitiesthey can be formed
only if owners follow the legal steps
requiredand must also have a statutory agent for
service of process.
163Pre-Learning Question
How does the law deal with incorporation problems?
164Incorporation Problems
The courts have developed two doctrinesde facto
corporations and corporation by estoppelto deal
with incorporation problems.
165De Facto Corporation
Even when making a good faith attempt to
incorporate, promoters sometimes inadvertently
make an error in filing, or fail to complete the
incorporation.
166De Facto Corporation
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.
167Corporation by Estoppel
Like other estoppel doctrines, corporation by
estoppel stops people from denying the
consequences of their own actions.
168Corporation by Estoppel
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.
169Corporation by Estoppel
When this happens, the court will not allow that
party to then deny the existence of the
corporation because doing so would be unfair.
170Piercing the Corporate Veil
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.
171Section 28.1 Assessment
Reviewing What You Learned
- What is a corporation? Who are its owners?
172Section 28.1 Assessment
Reviewing What You Learned
Answer
An artificial person created by law owned by
shareholders or stockholders.
173Section 28.1 Assessment
Reviewing What You Learned
- What are the two main types of corporations?
174Section 28.1 Assessment
Reviewing What You Learned
Answer
Public and private.
175Section 28.1 Assessment
Reviewing What You Learned
- What are the steps necessary to form a
corporation?
176Section 28.1 Assessment
Reviewing What You Learned
Answer
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
177Section 28.1 Assessment
Reviewing What You Learned
Answer
initial shareholders elect a board of directors
and directors elect a chairman and top officers
to manage the corporation.
178Section 28.1 Assessment
Reviewing What You Learned
- How are corporations financed?
179Section 28.1 Assessment
Reviewing What You Learned
Answer
By selling shares of stock in the corporation.
180Section 28.1 Assessment
Reviewing What You Learned
- What is the difference between a corporation and
a limited liability company?
181Section 28.1 Assessment
Reviewing What You Learned
Answer
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.
182Section 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?
183Section 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.
184Section 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.
185Section 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 isnt sure how to go
about it.
186Section 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.
187Section 28.1 Assessment
Legal Skills in Action Answer Forming a
Corporation
Letters will vary, but should include contacting
the secretary of states office in Dirks state.
188End of Section 28.1