All businesses have liability, but the type of ownership selected to run that business will determine how much liability to the owner of the business.

Sole Proprietorship – a legally defined type of business ownership in which a single individual: Owns the business Collects all profits from the business Has unlimited liability for its debt

Most small businesses operate as a sole proprietorship and the majority of all businesses in the United States are sole proprietorships.

There are various advantages of sole proprietorships: Simplest and least expensive to start Business income and expenses are

reported on the owner’s personal income tax statement

Sole decision maker of the business

There are also many disadvantages of sole proprietorships: Has unlimited liability for the business Difficult to borrow money or attract

investors Difficult to expand the business with

limited capital

Most communities require a business license, at least in order for you to set up a sole proprietorship.

Naming the Business A person may use their own name to

describe the sole proprietorship Any name other than the owner’s name is

referred to as a trade name or DBA (Doing Business As)

Tax ID Number The federal government and some

states require a business to have a Tax ID Number for tax purposes.

Business owners can use their Social Security Number if there is no other employees

If employees are hired, an entrepreneur must obtain a Employer Identification Number (EIN)

Partnership A legally defined type of business

organization in which at least two individuals share: ▪ Management ▪ Profit▪ liability

General Partnerships All partners have unlimited liability and are

responsible for business debt All partners assume personal financial risk

Limited Partnerships Structured so that at least one partner

(general partner) has limited liability for the business debts

Other partners have no say in company’s day to day operations

Advantages of Partnerships Generally the same as setting up a sole

proprietorship in terms of taxes and paperwork

The general partner can rely on the entrepreneurial skills and financial backing of at least two individuals instead of just one

Can generate more funds from investors Offer an incentive to employees that they can

possibly be one day partners of the business

Disadvantages of Partnerships Profit is split between the partners Each partner is responsible for the

business related actions of all the others Partners could have trouble agreeing on

direction of the business

Partnership Agreement A legal document that clearly defines how

the work, responsibilities, rewards, and liabilities of a partnership will be shared by the partners

It also specifies:▪ What happens if a business owner dies▪ How the business could dissolve▪ How the profits and responsibilities will be split up