Lesson 1 of 6 · 13 min
Sole proprietorships and partnerships
The legal form of a business decides who carries its risks, who runs it, how its profits are taxed and how much money it can raise; sole proprietorships and partnerships are simple but leave owners personally exposed and limit growth.
In short
- Market economies have three kinds of organisation: businesses (for profit), non-profits and governments. This module is about businesses.
- Business forms are compared on five attributes: legal identity, owner-manager relationship, owner liability, taxation and access to financing.
- A sole proprietorship is one owner who provides the capital, runs the business, keeps all profits and has unlimited liability.
- In a general partnership two or more partners share control, profits and unlimited liability; if one cannot pay, the others are liable for the whole debt.
- A limited partnership needs at least one general partner (GP) with unlimited liability who usually manages; limited partners (LPs) can lose only what they invested and usually do not manage. In a limited liability partnership (LLP) every partner has limited liability.
- Proprietorships and partnerships are pass-through entities: no tax at the business level, owners pay personal tax on their share of profit whether or not it is distributed.
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