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X100 ©2008 KEAW L3
Business FormsBusiness Forms
Professor Kenneth EA Wendeln Professor Kenneth EA Wendeln
Sole Proprietorships and Partnerships
Sole Proprietorships and Partnerships
X100Introduction to Business
X100Introduction to Business
X100 Business Forms - Sole Proprietorships & Partnerships L3-2
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.
X100 Business Forms - Sole Proprietorships & Partnerships L3-3
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-4
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-5
Relative Business Ownership in the US in 2004-2005
Number of Tax Returns Business Revenues
$1,017 B4.4%
Partnerships$2,569 B11.2%
Source: US Census Bureau, Statistical Abstract of the United States, 2004-05, www.census.gov
Non-Farm SoleProprietorships
18.3 M71.6%
Partnerships2.1 M8.4%
Corporations$19,308 B84.4%
Corporations5.1 M
20.0%
X100 Business Forms - Sole Proprietorships & Partnerships L3-6
Entities Governing Forms of Business Ownership
IRS Income &
FICA Taxes
STATE Legal
Charters
Forms of
Ownership
Sole Proprietorships
Partnerships • General
• Limited• ‘LLP’
X100 Business Forms - Sole Proprietorships & Partnerships L3-7
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/
X100 Business Forms - Sole Proprietorships & Partnerships L3-8
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-9
Relative Business Ownership in the US in 2004-2005
Number of Tax Returns Business Revenues
$1,017 B4.4%
Source: US Census Bureau, Statistical Abstract of the United States, 2004-05, www.census.gov
Non-Farm SoleProprietorships
18.3 M71.6%
X100 Business Forms - Sole Proprietorships & Partnerships L3-10
Entities Governing Forms of Business Ownership
IRS Income &
FICA Taxes
Forms of
Ownership
Sole Proprietorships
X100 Business Forms - Sole Proprietorships & Partnerships L3-11
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-12
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-13
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 ProfitReported on 1040
$ 2456
320
2136
Tracy Topspin
Tennis Lessons
312 56 2456
X100 Business Forms - Sole Proprietorships & Partnerships L3-14
‘Informal Forms’ - SummarySole 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
X100 Business Forms - Sole Proprietorships & Partnerships L3-15
PartnershipA 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 - General 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
X100 Business Forms - Sole Proprietorships & Partnerships L3-16
Types of Partnerships1. 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
X100 Business Forms - Sole Proprietorships & Partnerships L3-17
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-18
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-19
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
X100 Business Forms - Sole Proprietorships & Partnerships L3-20
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’ - SummarySole Proprietorships & Partnerships
IRS Income &
FICA Taxes
Forms of
Ownership
Sole Proprietorships
Partnerships • General
s
X100 Business Forms - Sole Proprietorships & Partnerships L3-21
IRS Forms for PartnershipsForm 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
TraceyTopspin
X100 Business Forms - Sole Proprietorships & Partnerships L3-22
‘Formal Forms’ of PartnershipsLimited & 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...
X100 Business Forms - Sole Proprietorships & Partnerships L3-23