Sole Proprietorships and Partnerships

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SOLE PROPRIETORSHIPS AND PARTNERSHIPS

A sole proprietorship is a business entity owned by one party, and is the simplest of the forms of business: •It is easy to form.
The business income is taxed along with the owner’s other income. •The owner is liable for the debts of the business.
The owner controls the decisions of the business.
The business ends when the owner does.

The sole proprietorship is often the starting point for a small, fledgling business. But a sole proprietorship is often limited in its access to funds beyond bank loans. Another form of business that offers additional source of funds is the partnership. A partnership is an agreement between two or more persons to operate a business. A partnership is similar to the sole proprietorship except instead of one proprietor, there is more than one. The fact that there is more than one proprietor introduces some issues: Who has a say in the day-to-day operations of the business? Who is liable (that is, financially responsible) for the debts of the business? How is the income distributed among the owners? How is the income taxed? Some of these issues are resolved with the partnership agreement; others are resolved by laws. The partnership agreement describes how profits and losses are to be shared among the partners, and it details their responsibilities in the management of the business. Most partnerships are general partnerships, consisting only of general partners who participate fully in the management of the business, share in its profits and losses, and are responsible for its liabilities. Each general partner is personally liable for the debts of the business, even if those debts were contracted by other partners.

A limited partnership consists of at least one general partner and limited partner. Limited partners invest in the business, but do not participate in its management. A limited partner’s share in the profits and losses of the business is limited by the partnership...
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