x100©2008 keaw l3 business forms professor kenneth ea wendeln sole proprietorships and partnerships...

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.


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


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


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%


Entities Governing Forms of Business Ownership

IRS Income &

FICA Taxes

STATE Legal

Charters

Forms of

Ownership

Sole Proprietorships

Partnerships • General

• Limited• ‘LLP’



IRS Income &

FICA Taxes

STATE Legal

Charters

SEC Securities

Regulations

Forms of

Ownership



Corporations• ‘C’ Corps • ‘S’ Corps


• Publicly Traded

Limited Liability Companies• Multi-member • Single-member

http://www.IN.gov/sos/

http://www.sec.gov/


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


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%



IRS Income &

FICA Taxes

Forms of

Ownership



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


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


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


‘Informal Forms’ - SummarySole Proprietorships

IRS Income &

FICA Taxes

Forms of

Ownership


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


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


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


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


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


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


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



s


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


‘Formal Forms’ of PartnershipsLimited & Limited Liability Partnerships

IRS Income &

FICA Taxes

STATE Legal

Charters

Forms of

Ownership




• 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©2008 keaw l3 business forms professor kenneth ea wendeln sole proprietorships and partnerships...

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