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3-6 Forms of Business Ownership [CH 3

business successful. To illustrate, a sole proprietor wants to engage in the dairy
business with milk cows that would supply the local market with fluid milk, cream,
cheese, and even ice-cream. The entrepreneur knows that a 500-cow dairy would be an
economical unit providing a financial base for production and years of productivity.
This intrepid entrepreneur possesses exceptionally limited knowledge and experience
with the health, care, breeding and management of a dairy, though his market analysis
indicates that the need for a dairy exists. His is a lack of technical expertise, but it can
be overcome.
As a business grows, the wide range of responsibilities become too large in volume
and the owner may be unable to perform all duties with equal effectiveness. To
overcome management/ownership limitations requires hiring help, which requires
capital to pay for the labor.
Unlimited liability. Because there is no legal distinction between the business
owner and their business in a sole proprietorship, the owner is personally liable for all
business debts. If the debts of the business cannot be satisfied by the assets of the
business, then the owners’ personal assets, those not associated with the business, may
be required to satisfy the debts of the business. In a debt liquidation proceeding, the
sole proprietor may be required to sell household furniture, real property (including the
family home), and personal automobile in order to satisfy business debts. Business
failure for a sole proprietor can mean financial ruin that takes years to recover.
Lack of Continuity. Sole proprietorships terminate upon the death of the owner.

Even if they would like to pass the business on to their children, Inheritance taxes can
be prohibitive for heirs which may require them to sell the family business just to meet
the tax obligations. A change in personal interests and retirement can also terminate a
sole proprietorship.

Partnerships
Partnerships are another form of private business ownership. A partnership is
partnership
Two or more persons defined in The Uniform Partnership Act as an association of two or more persons who
operating a business as co- operate a business as co-owners by voluntary legal agreement (contract). Partnerships
owners. are used by individuals who are not related and want to go into business together.
Commonly one hears about professional organizations such as law firms, and
accounting firms as being partnerships. However, as a professional organizations

grow, they will want to limit their liabilities and therefore incorporate and take on the
general partnership designations of P.C. (professional corporation), S.C. (service corporation), P.S. (public
Partnership in which all service), and/or an LLC (Limited Liability Company).
partners are liable for the A general partnership is a business structure where all of the partners act as co-
businesses debts. owners, sharing liability equally and unequally for the business's debts—that is each

limited partnership partner shares unlimited liability, as described for sole proprietors. Another form of
Partnership composed of partnership is the limited partnership. A limited partnership requires at least one
one or more general general partner, more general partners may exist, and one or more limited partners. A
partners and one or more limited partnership grants limited partners limited liability, and general partners
partners with limited liability. unlimited liability. The liability risk for a limited partner is the extent of his financial
contribution to the partnership, provided that he has no active management role in the

business, whereas the general partner may be required to sell off all of his personal
assets to cover the debts of the business.
The sale of limited partnership shares is a common way of financing businesses.
master limited partnership Master Limited Partnership. Master limited partnerships were devised as an
A limited partnership that is investment that would combine the tax benefits of a limited partnership with the
publicly traded and
functions like a corporation. liquidity of publicly traded securities. Firms set up as master limited partnerships
function like corporations in that they publicly traded stock on the major exchanges;
yet, in some master limited partnerships, the earnings are taxed only once, to the
partners. This form of ownership, begun in 1981, initiated with the oil and real estate
industry booms. The Tax Reform Act of 1986, which increased the corporate tax

burden, began to set limits on MLP’s. However, these partnerships spread to other
industries and are used by both large and small firms. The Disney Corporation used
joint venture MLP’s to finance a number of films under Screen Partners.
Partnership formed for a A joint venture, another type of partnership, involves two or more parties forming
specific undertaking. a temporary business for a specific undertaking—for example, a group of investors

who import a shipment of high-tech equipment from China with the purpose of selling
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