Economics / Unit 6: Business Organization and Labor
6.1 Sole Proprietorships and Partnerships
Notes
- A sole proprietorship is a business owned and run by one person. It is the most common form of U.S. business, though most are small.
- Advantages: easy and cheap to start, the owner keeps all profits and makes all decisions, and profits are taxed only once as the owner's income.
- Disadvantages: unlimited liability (the owner's personal property, such as a house or savings, can be taken to pay business debts), limited ability to raise money, and the business may end when the owner leaves or dies (limited life).
- A partnership is owned by two or more people who share profits, decisions and responsibilities, ideally under a written partnership agreement.
- In a general partnership, all partners have unlimited liability. In a limited partnership, at least one general partner runs the business and has unlimited liability, while limited partners invest money and risk only what they put in.
- Advantages: more money and skills than one owner. Disadvantages: possible conflicts, shared profits, and liability for partners' decisions.
- Worked example: two partners agree to split profits $60\%$ and $40\%$. If the business earns $90,000, they receive $54,000 and $36,000.
Practice
A sole proprietor's business fails, owing $40,000 to suppliers. Because of unlimited liability:
Unlimited liability means the owner is personally responsible for business debts.
Three partners split profits equally under their agreement. The business earns $96,000. Each partner receives:
$96{,}000 \div 3 = 32{,}000$.
In a limited partnership, a limited partner:
Limited partners are investors whose liability is limited to their investment.
Ready for more? Take the Unit 6 test.