Evaluating Small Business Structures: Sole Proprietorships and Partnerships

4 key factors for evaluating a small business organization

1. Ease of creation 2. Liability 3. Tax consideration 4. Raising capital

Sole Proprietorship

A business owned and operated by one person — the owner and the business are the same.

Advantages of a Sole Proprietorship

Easy to start, owner keeps all profits, total control, not separately taxed, easy to sell.

Disadvantages of a Sole Proprietorship

Unlimited personal liability, hard to raise funds, ends at owner's death or incapacity.

Taxation of a Sole Proprietorship

It's a pass-through entity — owner reports business income on personal taxes.

Partnership

Two or more persons agree to carry on a business for profit as co-owners with joint control.

Legal rule for Partnerships

Governed by Agency Law (no separate 'partnership law').

Tax status of Partnerships

No — partnerships file an informational return; profits/losses pass through to partners.

Formation of a Partnership

By intent — can be oral, written, or implied by conduct.

General Partnership

Sharing of profits, joint ownership, equal management, and unlimited personal liability.

Liability in a General Partnership

Each partner has unlimited personal liability for torts and contracts.

Lawsuits in a General Partnership

Partners can be sued jointly (as a group) or severally (individually).

Loss sharing in a General Partnership

In the same way profits are shared — not based on capital contributions.

Ownership of partnership property

The partnership itself owns any property it acquires.

New Partner Liability for Old and New Debts

Old debts: Only liable up to capital investment. New debts: Full unlimited personal liability.

Management decision rule in a General Partnership

Majority rule (51%) controls ordinary business decisions.

Fiduciary duties of partners

Loyalty (no stealing/competing) and Care (no reckless actions).

Agency in a partnership

Each partner is an agent who can bind the partnership when acting with authority.

Partnership termination (Dissolution)

Acts of partners (agreement, death, incapacity), Operation of law (business purpose becomes illegal), Judicial decree (court-ordered dissolution).

Distribution of partnership assets upon dissolution

Pay creditors, Repay partner loans, Return capital contributions, Distribute remaining balance among partners.