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Advantages of the Sole Proprietorship
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Base of formation. There is less formality and fewer legal restrictions associated with establishing a sole proprietorship. It needs little or no governmental approval and is usually less expensive than a partnership or corporation.
Sole ownership of profits. The proprietor is not required to share profits with anyone.
Control and decision making vested in one owner. There are no co-owners or partners to consult. (Except possibly your spouse.)
Flexibility. Management is able to respond quickly to business needs in the form of day to day management decisions as governed by various laws and good sense.
Relative freedom from governmental control and special taxation.
Disadvantages of the Sole Proprietorship
Unlimited liability. The individual proprietor is responsible for the full amount of business debts which may exceed the proprietor'stotal investment. This liability extends to all the proprietor's assets, such as house and car. Additional problems of liability, such as physical loss or personal injury, may be lessened by obtaining proper insurance coverage.
Unstable business life. The enterprise may be crippled or terminated upon illness or death of the owner.
Less available capital, ordinarily, than in other types of business organizations.
Relative difficulty in obtaining long term financing.
Relatively limited viewpoint and experience. This is more often the case with one owner than with several.
NOTE: A small business owner might very well select the sole proprietorship to begin with. Later, if the owner succeds and feels the need, he or she can form a partnership or corporation.
The small business owner is required to wear many hats, but no one can be expected to be a lawyer, certified public accountant, marketing specialist, production engineer, environmental specialist, etc. Therefore, you should get the facts before making decisions. When necessary and if possible, you should also get professional counsel to help you avoid misunderstanding technical or legal issues and avoid making bad decisions and false starts that require backtracking and added expense. This is especially true when you are deciding what legal form to adopt.
THE PARTNERSHIP
The Uniform Partnership Act, adopted by many states, defines partnership as "an association of two or more persons to carry on as co-owners of a business for profit." Though not specifically required by the Act, written Articles of Partnership are customarily executed. These articles outline the contribution by the partners into the business (whether financial, material or managerial) and generally delneate the roles of the partners in the business relationship. The following are example articles typically contained in a partnership agreement:
Name, Purpose, Domicile
Duration of Agreement
Character of Partners (general or limited, active or silent)
Contributions by Partners (at inception, at later date)
Business Expenses (how handled)
Authority (individual partner authority in conduct of business)
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Separate Debts
Books, Records, and Method of Accounting
Division of Profits and Losses
Draws or Salaries
Rights of Continuing Partner
Death of a Partner (dissolution and winding up)
Employee Management
i. Release of Debts
j. Sale of Partnership Interest
k. Arbitration
l. Additions, Alterations, or. Modifications of Partnership Agreement
m. Settlements of Disputes
n. Required and Prohibited Acts
o. Absence and Disability
Some of the characteristics that distinguish a partnership from other forms of business organization are the limited life of a partnership, unlimited liability of at least one partner, co-ownership of the assets, mutual agency, share of management, and share in partnership profits.
Advantages of the Partnership
Ease of formation. Legal informalities and expenses are few compared with the requirements for creation of a corporation.
Direct rewards. Partners are motivated to apply their best abilities by direct sharing of the profits.
Growth and performance facilitated. In a partnership, it is often possible to obtain more capital and a better range of skills than in a sole proprietorship.
Flexibility. A partnership may be relatively more flexible in the decision making process than in a corporation. But it may be less so than in a sole proprietorship.
Relative freedom from government control and special taxation.
Disadvantages of a Partnership
Unlimited liability of at least one partner. Insurance considerations such as those mentioned in the proprietorship section apply here also.
Unstable life. Elimination of any partner constitutes automatic dissolution of partnership. However, operation of the business can continue based on the right of survivorship and possible creation of a new partnership. Partnership insurance might be considered.
Relative difficulty in obtaining large sums of capital. This is particularly true of long term financing when compared to a corportion. However, by using individual partners' assets, opportunities are probably greater than in a proprietorship.
Firm bound by the acts of just one partner as agent.
Difficulty of disposing of partnership interest. The buying out of a partner may be difficult unless specifically arranged for in the written agreement.
THE CORPORATION
The corporation is by far the most complex of the three business structures.
As defined by the Chief Justice Marshall's famous decision in 1819, a corporation " is an artificial being, invisible, intangible, and existing only in contemplation of the law." In other words, a corporation is a legal entity, distinct from the individuals who own it.
Formation of the Corporation
A corporation usually is formed by the authority of a state government. Corporations which do business in more than one state must comply with the Federal laws regarding interstate commerce and with the state laws, which may vary considerably.
The procedure ordinarily required to form a corporation is that, first, subscriptions for capital stock must be taken and a tentative organization created. Then, approval must be obtained from the Secretary of State in the state in which the corporation is to be formed. This Approval is in the form of a charter for the corporation, stating the powers and limitations of the particular enterprise.
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Advantages of the Corporation
Limitations of the stockholder's liability to a fixed amount of investment. However, do not confuse corporate liability with appropriate liability insurance considerations.
Ownership is readily transferable.
Separate legal existence.
Stability and relative permanence of existence. For example, in the case of illness, death, or other cause for loss of a "principal" (officer or owner), the corporation continues to exist and do business.
Relative ease of securing capital in large amounts and from many investors. Capital may be acquired through the issuance of variuos stocks and long term bonds. There is relative ease in securing long term financing from lending institutions by taking advantage of corporate assets and often personal assets of stockholders and principals of guarantors. (Personal guarantees are very often required by lenders.)
Delegated authority. Centralized control is secured when owners delegate authority to hired managers, although they are often one and the same.
The ability of the corporation to draw on the expertise and skills of more than one individual.
Disadvantages of the Corporation
Activities limited by the charter and by various laws. However, some states do allow very broad charters.
Manipulation. Minority stockholders are sometimes exploited.
Extensive government regulations and required local, state, and federal reports.
Less incentive if manager does not share in profits.
Expense of forming a corporation.
Double tax - income tax on corporate net income (profit) and on individual salary and dividends.
Unit 7A
The civil cases
A ‘tort’ is a civil wrong which injures someone or harms a person’s property or reputation. Sometimes it is negligence. Negligence can occur in many situations. For example, when a hospital gives a patient a transfusion of the wrong type of blood, or a solicitor gives his client wrong advice because he has overlooked a new law, or a company fails to make sure its employees’ working conditions are safe. Anybody who is injured or who suffers financial loss through someone else’s negligence has a right to sue in the civil courts for compensation.
Negligence is only one of a range of torts, or wrongs, for which it is possible to sue and claim damages. Other torts include assault, libel, slander and nuisance. But by far the most common tort, in terms of the number of court actions started, is negligence.
Apart from tort, the other big category of civil action is for breach of contract. When two parties enter into a contract, they both agree to carry out certain obligations. The contract need not be in writing. An oral agreement to buy something from a shop or to do some work is just as much a contract as a document running to a dozen pages of legalese.
Unit 7B
INTERNATIONAL BUSINESS
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