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

3. 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.

4. 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

5. 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

6. X100Business Forms - Sole Proprietorships & PartnershipsL3-5 Relative Business Ownership in the US in 2004-2005 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, 2004-05, www.census.govwww.census.gov 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%

7. 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’

8. 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 http://www.IN.gov/sos/ http://www.sec.gov/

9. 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

10. X100Business Forms - Sole Proprietorships & PartnershipsL3-9 Relative Business Ownership in the US in 2004-2005 Number of Tax Returns Business Revenues $1,017 B 4.4% Source: US Census Bureau, Statistical Abstract of the United States, 2004-05, www.census.govwww.census.gov Non-Farm Sole Proprietorships 18.3 M 71.6%

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

12. 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

13. 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

14. 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 $ 2456 320 2136 Tracy Topspin Tennis Lessons 312 56 2456

15. 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

16. 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 - 2.1 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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 http://www.irs.gov/ 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

23. 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 http://www.in.gov/sos...

24. X100Business Forms - Sole Proprietorships & PartnershipsL3-23