Chapter 31 Entrepreneurs and Sole Proprietorships

Entrepreneur A person who forms and operates a new business either by him- or herself or with others. Copyright © 2004 by Prentice-Hall. All rights reserved.

Entrepreneurial Forms of Conducting Business Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company Corporation Copyright © 2004 by Prentice-Hall. All rights reserved.

Sole Proprietorship A form of business where the owner is actually the business. The business is not a separate legal entity. Sole proprietorships are the most common form of business organization in the United States. Copyright © 2004 by Prentice-Hall. All rights reserved.

Creation of a Sole Proprietorship There are no formalities. No federal or state government approval is required. Some local governments require all businesses (including sole proprietorships) to obtain a license to do business within the city. A sole proprietorship can operate under the name of the sole proprietor or a trade name. Copyright © 2004 by Prentice-Hall. All rights reserved.

Creation of a Sole Proprietorship (continued) A sole proprietorship is not a separate tax-paying entity for federal income tax purposes. A sole proprietor need not file an informational return with the Internal Revenue Service (IRS). Income and losses are reported on the sole proprietor’s personal income tax return. Copyright © 2004 by Prentice-Hall. All rights reserved.

Advantages of a Sole Proprietorship The ease and low cost of formation. The owner’s right to make all management decisions concerning the business. Including those involving hiring and firing employees. The sole proprietor owns all of the business and has the right to receive all of the business’s profits. Copyright © 2004 by Prentice-Hall. All rights reserved.

Advantages of a Sole Proprietorship (continued) A sole proprietorship can be easily transferred or sold if and when the owner desires to do so. No other approval (such as from partners or shareholders) is necessary. Copyright © 2004 by Prentice-Hall. All rights reserved.

Disadvantages of a Sole Proprietorship The sole proprietor’s access to capital is limited to personal funds plus any loans he or she can obtain. The sole proprietor is legally responsible for the business’s contracts and the torts committed by the proprietor and his or her employees in the course of employment. Copyright © 2004 by Prentice-Hall. All rights reserved.

Personal Liability of a Sole Proprietor The sole proprietor bears the risk of loss of the business. The owner will lose his or her entire capital contribution if the business fails. The sole proprietor has unlimited personal liability. Copyright © 2004 by Prentice-Hall. All rights reserved.

Personal Liability of a Sole Proprietor (continued) Creditors may recover claims against the business from the sole proprietor’s personal assets. The law holds that a sole proprietorship is not a distinct legal entity. The sole proprietorship and the sole proprietor are one and the same. Copyright © 2004 by Prentice-Hall. All rights reserved.

Personal Liability of a Sole Proprietor (continued) Debt or obligation owed Sole Proprietorship Third Party Capital investment Sole Proprietor (Owner) Personal liability for sole proprietorship’s debts and obligations Copyright © 2004 by Prentice-Hall. All rights reserved.

Conducting International Business: Direct Export and Import Sales The simplest form of conducting international business is to engage in direct export or import sale. The main benefits of conducting international business this way are: It is inexpensive It usually involves just entering into contracts Copyright © 2004 by Prentice-Hall. All rights reserved.

Conducting International Business: Sales Agents and Representatives Companies wishing to do business in a foreign country often appoint a local agent or representative to represent them in that country. Sales Representative – may solicit and take orders for his or her foreign employer. Does not have authority to bind the company contractually. Sales Agent – may enter into contracts on behalf of his or her foreign employer. Copyright © 2004 by Prentice-Hall. All rights reserved.

Conducting International Business: Foreign Distributor A foreign distributor is generally used when a company wants a greater presence in a foreign market than is possible through a sales agent or representative. A local firm separate and independent from the exporter. Usually given an exclusive territory. Takes title to the goods and makes a profit on the resale of the goods in the foreign country. Copyright © 2004 by Prentice-Hall. All rights reserved.

Conducting International Business Using a Branch Office Branch Office – used where a corporation wants to enter a foreign market in a substantial way but wants to retain exclusive control over the operation. It is not a separate corporation or legal entity. It is an extension of the corporate owner. It is wholly owned by the home corporation. Copyright © 2004 by Prentice-Hall. All rights reserved.

Conducting International Business Using a Branch Office (continued) Corporation A (in Country A) No limited liability shield – Corporation A in Country A is liable for the tort and contract liabilities of its branch office in Country B. The branch office is not a separate legal entity. Branch Office (in Country B) Copyright © 2004 by Prentice-Hall. All rights reserved.

Conducting International Business Using a Subsidiary Corporation Subsidiary Corporation – A separate corporation established by the parent corporation to conduct business in a foreign country. Must be formed pursuant to the laws of the country in which it is to be located. The parent corporation and the subsidiary organization are separate legal entities that are individually capitalized. Copyright © 2004 by Prentice-Hall. All rights reserved.

Corporation A (in Country A) Corporation B (in Country B) Conducting International Business Using a Subsidiary Corporation (continued) Corporation A (in Country A) Limited liability shield – Corporation A in Country A is not liable for the tort and contract liabilities of its subsidiary corporation in Country B except up to its capital contribution in Corporation B. Corporation B (in Country B) Corporation B is a separate legal entity. Copyright © 2004 by Prentice-Hall. All rights reserved.