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Section 27.1. Sole Proprietorship and Partnership. Chapter. 27. Section 27.1 Sole Proprietorship Section 27.2 The Partnership . What You’ll Learn. How to define sole proprietorship (p. 584) How to create a sole proprietorship (p. 584). What You’ll Learn.

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slide2

Sole Proprietorship and Partnership

Chapter

27

Section 27.1

Sole Proprietorship

Section 27.2

The Partnership

slide3

What You’ll Learn

  • How to define sole proprietorship (p. 584)
  • How to create a sole proprietorship (p. 584)
slide4

What You’ll Learn

  • How to identify the advantages of a sole proprietorship (p. 585)
  • How to identify the disadvantages of a sole proprietorship (p. 587)
slide5

Why It’s 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.

slide6

Legal Terms

  • sole proprietorship (p. 584)
  • fictitious name (p. 584)
  • employer identification number (p. 585)
  • unlimited liability (p. 587)
slide7

Section Outline

Creation and Operation of a Sole Proprietorship

Advantages of a Sole Proprietorship

Disadvantages of a Sole Proprietorship

slide8

Pre-Learning Question

What is a sole proprietorship?

slide9

Creation 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.

slide10

Creation 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
slide11

Creation 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.

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Creation 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.

slide13

Creation and Operation

of a Sole Proprietorship

In selecting a fictitious name, sole proprietors must not choose a company name already in use.

slide14

Creation and Operation

of a Sole Proprietorship

There usually are few formal requirements in establishing a sole proprietorship.

slide15

Creation 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
slide16

Creation 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.

slide17

Advantages of a Sole Proprietorship

  • Ease of creation
  • Total control
  • Retention of profits
  • Freedom from excessive governmental control
  • One-time taxation of profits
slide18

Ease 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.

slide19

Ease 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.

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Total 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.

slide21

Retention of Profits

Sole proprietors get to keep all of the profits that the firm makes.

They must, of course, pay taxes on those profits.

slide22

Freedom 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.

slide23

One-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.

slide24

Disadvantages

of a Sole Proprietorship

  • Limited capital
  • Unlimited liability
  • Limited human resources
  • Limited lifetime
slide25

Limited Capital

All money used to finance the business must come from the proprietor’s savings or income, or from loans obtained by the proprietor.

slide26

Unlimited Liability

Unlimited liability means that the business owner is responsible for all losses experienced by the business.

slide27

Limited 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.

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Limited 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.

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Amira wants to start her own business. She really doesn’t like the idea of working for someone else—she wants work to suit her own schedule and she has very definite ideas about how a business should be run.

slide30

Her 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.

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Given Amira’s circumstances, name one advantage Amira would find to having a sole proprietorship. Name one disadvantage.

slide32

ANSWER

Advantage—total control; disadvantage—limited capital.

slide33

Section 27.1Assessment

Reviewing What You Learned

  • What is a sole proprietorship?
slide34

Section 27.1Assessment

Reviewing What You Learned

Answer

A form of business that is owned and operated by one person.

slide35

Section 27.1Assessment

Reviewing What You Learned

  • How does a sole proprietorship begin?
slide36

Section 27.1Assessment

Reviewing What You Learned

Answer

To create a sole proprietorship, a person needs only to begin the operation of the business.

slide37

Section 27.1Assessment

Reviewing What You Learned

  • What are the advantages of a sole proprietorship?
slide38

Section 27.1Assessment

Reviewing What You Learned

Answer

Ease of creation, total control, retention of profits, freedom from excessive governmental control, and one-time taxation of profits.

slide39

Section 27.1Assessment

Reviewing What You Learned

  • What are the disadvantages of a sole proprietorship?
slide40

Section 27.1Assessment

Reviewing What You Learned

Answer

Limited capital, unlimited liability, limited human resources, and limited lifetime.

slide41

Section 27.1Assessment

Critical Thinking Activity

Licensing Requirements

Why does the government interfere in the formation and regulation of some sole proprietorships by creating licensing requirements?

slide42

Section 27.1Assessment

Critical Thinking Activity Answer

Licensing Requirements

Answers will vary but could recognize that licensing requirements may be necessary for public safety.

slide43

Section 27.1Assessment

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.

slide44

Section 27.1Assessment

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.

slide45

Section 27.1Assessment

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.

slide46

Section 27.1Assessment

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.