X100©2008 KEAW L3 Business Forms Professor Kenneth EA Wendeln Sole Proprietorships and Partnerships Sole Proprietorships and Partnerships X100 Introduction to Business

X100Business Forms - Sole Proprietorships & PartnershipsL3-2 Forms of Business Ownership The form of ownership that is selected affects: 1.Legal charter & documents needed 2.Regulatory & reporting requirements 3.Financial resources available 4.Owners’ liability & risk of losses 5.Taxes - liabilities & benefits  affecting the business  affecting the owners (shareholders, partners, or members) 6.Length of life 7.Transfer of ownership 8.Ease of termination In the United States, an owner can select from a variety of specific forms of business ownership.

X100Business Forms - Sole Proprietorships & PartnershipsL3-3 General Categories of Business Ownership 2.Partnership  General Partnership  Limited Partnership  Limited Liability Partnership or ‘LLP’ The different forms have evolved in response to the specific needs of business people. 1.Sole Proprietorship 3.Corporation  ‘ C’ Conventional Corporation  ‘S’ Corporation 4. - Limited Liability Company

X100Business Forms - Sole Proprietorships & PartnershipsL3-4 Other Types of Business Ownership 1.Government-owned Corporations  Owned & operated by local, state or federal government  Usually provides a service the business sector is unable to offer  ‘Quasi-government’ corporations - partly business and partly government owned – eg NASA, TVA, FDIC 2.Not-for-Profit or Nonprofit Corporations  Provide social, educational, religious or other services  Not intended to earn a profit 3.Cooperatives  An association of individuals or firms  Purpose is to perform some business function – eg Agricultural Co-op 4.Joint Ventures  Agreement between two groups to form a business entity  Usually to form a specific goal or for a specific period of time 5.Syndicates  Temporary association to perform a task that requires large amounts of capital – eg underwrite insurance, loans, investments

X100Business Forms - Sole Proprietorships & PartnershipsL3-5 Relative Business Ownership in the US in Number of Tax Returns Business Revenues $1,017 B 4.4% Partnerships $2,569 B 11.2% Source: US Census Bureau, Statistical Abstract of the United States, , Non-Farm Sole Proprietorships 18.3 M 71.6% Partnerships 2.1 M 8.4% Corporations $19,308 B 84.4% Corporations 5.1 M 20.0%

X100Business Forms - Sole Proprietorships & PartnershipsL3-6 Entities Governing Forms of Business Ownership IRS Income & FICA Taxes STATE Legal Charters Forms of Ownership Sole Proprietorships Partnerships General Limited ‘LLP’

X100Business Forms - Sole Proprietorships & PartnershipsL3-7 Entities Governing Forms of Business Ownership IRS Income & FICA Taxes STATE Legal Charters SEC Securities Regulations Forms of Ownership Sole Proprietorships Partnerships General Corporations ‘C’ Corps ‘S’ Corps Limited ‘LLP’ Publicly Traded Limited Liability Companies Multi-member Single-member

X100Business Forms - Sole Proprietorships & PartnershipsL3-8 Sole Proprietorship  The most popular form of business formation – 13.3 million non-farm sole proprietorships represent 72% of all firms in the United States.  Usually small - averaging $50,000 in revenue, or only 4.4% of the total revenues of all US companies.  Treated as an ‘extension’ of the owner –  Earnings (and losses) are treated as personal income received by the owner and subject to personal income and Social Security taxes imposed by the IRS.  Owner has personal liability for all debts & obligations of the sole proprietorship. A business owned (and usually operated) by a single owner – the ‘proprietor’. Minimal formalities are required

X100Business Forms - Sole Proprietorships & PartnershipsL3-9 Relative Business Ownership in the US in Number of Tax Returns Business Revenues $1,017 B 4.4% Source: US Census Bureau, Statistical Abstract of the United States, , Non-Farm Sole Proprietorships 18.3 M 71.6%

X100Business Forms - Sole Proprietorships & PartnershipsL3-10 Entities Governing Forms of Business Ownership IRS Income & FICA Taxes Forms of Ownership Sole Proprietorships

X100Business Forms - Sole Proprietorships & PartnershipsL3-11 Advantages of Sole Proprietorships 1.Ease of startup  Minimal legal & filing requirements 2.Retention of all profits (& losses)  Startup ‘losses’ may be offset by other personal income 3.High personal control & flexibility 4.Taxed ‘once’ as personal income  On schedule ‘C’ or ‘C-EZ’ of IRS form 1040 at personal tax rates 5.Secrecy  Minimal or no reporting requirements

X100Business Forms - Sole Proprietorships & PartnershipsL3-12 Disadvantages of Sole Proprietorships 1.UNLIMITED personal liability  For the debts and obligations of the sole proprietorship 2.Lack of business continuity  Sole Proprietor is an ‘extension’ of the owner  Ceases when the owner dies or is deemed incompetent 3.Difficult to transfer ownership 4.Limited access to external funding  Funds provided by or ‘guaranteed’ by the owner 5.Limited management skills  Difficulty in hiring and retaining employees

X100Business Forms - Sole Proprietorships & PartnershipsL3-13 IRS Schedule C-EZ (1040) for Sole Proprietorship A sole proprietor would file a Schedule C (or Schedule C-EZ with net profit) and Schedule SE (for social security taxes due) with their IRS Form 1040 individual tax return A sole proprietor would file a Schedule C (or Schedule C-EZ with net profit) and Schedule SE (for social security taxes due) with their IRS Form 1040 individual tax return Revenues - Expenses = Net Profit Reported on 1040 $ Tracy Topspin Tennis Lessons

X100Business Forms - Sole Proprietorships & PartnershipsL3-14 ‘Informal Forms’ - Summary Sole Proprietorships IRS Income & FICA Taxes Forms of Ownership Sole Proprietorships An ‘extension’ of the individual involved: Easy to form - no legal charter required UNLIMITED personal liability for the business Single taxation at personal tax rates IRS Schedule C or C-EZ (1040) for income reporting

X100Business Forms - Sole Proprietorships & PartnershipsL3-15 Partnership A voluntary association of two or more persons who act as co-owners of a business for profit.  Popular form of business formation, especially among professional services’ organizations million partnerships represent 8.4% of all firms in the US.  Vary in size & number of partners - averaging $630,000 in revenue, or 11.2% of the total revenues of all US companies  Must have at least one General Partner - G eneral Partners are jointly and severally (individually) liable for all the debts & obligations of the partnership.  Earning (and losses) are allocated to the partners – treated as personal income received by each partner. Limited Partnerships & LLPs provide SOME liability protection to certain classes of partners

X100Business Forms - Sole Proprietorships & PartnershipsL3-16 Types of Partnerships 1.General Partnership  Includes ONLY General Partners  General Partners have SHARED RESPONSIBILITY for operating a business  Each General Partner can enter into contracts on behalf of all the others  Each General Partner assumes FULL LIABILITY for the debts and obligations of the partnership  Formal Partnership Agreement recommended but not required 2.Limited Partnership  Must have at least ONE General Partner who assumes FULL LIABILITY and operates the business  May have Limited Partners who do NOT PARTICIPATE in operating the business but provide capital & have LIMITED LIABILITY 3.Limited Liability Partnership (LLP)  Newer type that provides LIMITED ‘PROFESSIONAL’ LIABILITY for the acts of other Partners  Must have a Partnership Agreement & meet certain requirements

X100Business Forms - Sole Proprietorships & PartnershipsL3-17 Advantages of Partnerships 1.Ease of startup  Minimal legal & filing requirements for General Partnerships  Limited Partnerships & LLPs must file with the State 2.Greater potential access to funding  Partners can pool their funds and contribute assets 3.Retention of all profits (& losses)  As in a sole proprietorship, all profits belong to the owners of the partnership 4.Combined business skills & expertise of the partners 5.Partnership income is taxed ‘once’ as personal income to the partners

X100Business Forms - Sole Proprietorships & PartnershipsL3-18 Disadvantages of Partnerships 1.UNLIMITED personal liability for General Partners  Limited Partners and LLPs provide some limited liability but are more cumbersome to set up 2.Lack of continuity  Partnership terminated if any of the General Partners dies, withdraws or deemed incompetent 3.Management by consensus is difficult  General Partners must be able to work as a team  Each General Partner can enter into contracts on behalf of the others 4.Frozen Investment  It is easy to invest in a partnership  Sometimes quite difficult to get investments out

X100Business Forms - Sole Proprietorships & PartnershipsL3-19 Recommended Partnership Agreement 1.Names of the partners 2.Nature, name & address of the business 3.Duration of the partnership 4.Contribution of capital 5.Duties of each partner 6.Salaries, withdrawals and distribution of profits and losses 7.Termination  Dissolution provisions  Distribution of assets

X100Business Forms - Sole Proprietorships & PartnershipsL3-20 An ‘extension’ of the individual involved: Easy to form - no legal charter required UNLIMITED personal liability for the business Single taxation at personal tax rates ‘Informal Forms’ - Summary Sole Proprietorships & Partnerships IRS Income & FICA Taxes Forms of Ownership Sole Proprietorships Partnerships General s

X100Business Forms - Sole Proprietorships & PartnershipsL3-21 IRS Forms for Partnerships Form 1065 & Schedule K-1 The Partnership must file a Form 1065 Partnership Return – that determines the Partnership Income NO taxes are paid by the Partnership T & C Tennis Pro Shop Each partner receives a Schedule K-1 that informs the partner of his share of the Partnership’s income, credits and deductions Each partner includes their share in their Form 1040 individual tax returns Tracey Topspin

X100Business Forms - Sole Proprietorships & PartnershipsL3-22 ‘Formal Forms’ of Partnerships Limited & Limited Liability Partnerships IRS Income & FICA Taxes STATE Legal Charters Forms of Ownership Sole Proprietorships Partnerships General Limited ‘LLP’ Limited Partnerships & Limited Liability Partnerships (LLP’s) offer some ‘limited’ liability Must have a ‘legal charter’ with the state Single Taxation at personal tax rates

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