Business Organizations: Sole Proprietorships and Partnerships

Sole Proprietorships and Partnerships

This note covers sole proprietorships and partnerships, explaining the advantages and disadvantages of each.

Sole Proprietorships

• A sole proprietorship is a business owned by one person, known as the proprietor.
• It is the most basic and least formal type of business organization.
• Examples include flower shops, bookstores, and small farms owned by a single person.
• Advantage:
  • The owner receives all the profits and has full control of the business.
  • It is the most autonomous type of business.
  • The owner is their own boss and makes all hiring and marketing decisions.
  • It is the easiest type of business to start.
• Disadvantage:
  • The owner has unlimited liability, meaning they bear complete legal responsibility for all debts and damages arising from the business.
  • Personal assets (car, house, bank accounts) may be seized to pay off business debts.
• Example of Unlimited Liability: If someone slips and falls in your flower shop, you have full liability.

Partnerships

• A partnership is a business owned and operated by two or more people.
• Partnerships typically do not have shareholders and do not sell stock.
• There are four types of partnerships:
  • General Partnership
  • Limited Partnership (LP)
  • Limited Liability Partnership
  • Joint Ventures
• Partners sign a legally binding agreement that describes:
  • The duties of each partner.
  • The division of profits (percentage each partner receives).
  • The distribution of assets at the end of the partnership.

General Partnership

• Advantage:
  • Partners share control and profits.
  • They tend to be more efficient than a sole proprietorship.
  • Each partner specializes in the area they know most about.
  • Example: One person might handle advertising while another handles day-to-day business.
• Disadvantage:
  • Unlimited liability exists for every partner. Each partner is responsible for the debts and wrongdoings of every other partner while transacting business of the partnership.
  • Personal assets of all partners are at risk.
• Example of General Partnership Unlimited Liability: If someone slips due to water on the ground, all partners have unlimited liability.
• Other disadvantages include:
  • Possibility of personal conflict among partners.
  • The partnership must be reorganized if a partner quits or dies.

Limited Partnership (LP)

• In LPs, partners are not equal.
• Some partners have limited liability and bear no long-term risk.
• There are general partners and limited partners.
  • General partners: Fully responsible for the debts of the company.
  • Limited partners: Contribute money or property but have no voice in the company's management.
• Limited partners have no liability beyond their initial investment.
  • Example: If a limited partner gives 50,000, they can only lose that amount, even if the company owes millions in debt or lawsuits.