978-1133019145 Chapter 2 Solution Manual

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CHAPTER 2

Sole Proprietorships

THEME

Chapter 2 introduces students to sole proprietor-

ships, the formalities associated with doing

business as a sole proprietorship, and the ad-

vantages and disadvantages of doing business as

a sole proprietorship.

CHAPTER GOAL

The goal of this chapter is for students to be-

come familiar with the following terms and

topics concerning sole proprietorships:

• Sole proprietor and sole proprietorship

• The legal formalities that must be followed

by sole proprietors

• Advantages and disadvantages of doing

business as a sole proprietor

• The concept of assumed names and the

procedures that must be followed before us-

ing an assumed name, trade name, or ficti-

tious name

• The role of paralegals who work with sole

proprietors

• Resources for further research regarding

sole proprietorships

SUGGESTED APPROACH

Most students will be familiar with individuals

who are sole proprietors. They may even be sole

proprietors themselves. Discussions may in-

volve the students’ personal experiences in

complying with the formalities associated with

doing business as a sole proprietorship. Many of

these will be state or local formalities. Helpful

information may be obtained from the local of-

fice of the U.S. Small Business Administration.

LECTURE NOTES

Sole Proprietorship Defined

1. The sole proprietorship is an unincorpo-

rated business owned by one person.

2. The sole proprietorship is not considered a

separate entity. Rather, it is an extension of

the individual sole proprietor.

3. The sole proprietor is personally responsi-

ble for all debts and obligations of the sole

proprietorship and is entitled to all of the

profits of the business.

4. The sole proprietor may hire employees

and agents, but retains the ultimate authori-

ty for all business decisions.

5. The sole proprietor is responsible for all

business-related acts of his or her

employees.

Sole Proprietorships in the United States

6. Sole proprietorships are the simplest and

most common form of business in the

United States.

Advantages of Doing Business as a Sole Pro-

prietorship

7. Advantages of doing business as a sole

proprietor include the full management au-

thority possessed by the sole proprietor, the

minimal formalities and reporting require-

ments imposed on sole proprietorships, the

low cost of operating the sole proprietor-

ship, and income tax benefits.

Disadvantages of Doing Business as a Sole

Proprietorship

8. The most serious disadvantage of doing

business as a sole proprietorship is the un-

limited liability of the sole proprietor for all

debts and obligations incurred by the busi-

ness.

9. Other disadvantages to doing business as a

sole proprietorship include a lack of busi-

ness continuity, a lack of diversity in man-

agement, difficulty in transferring the

sole proprietor’s business, the sole pro-

prietor’s limited ability to attract high-

8 PART I Guide for Instructors and Answers to Chapter Review Questions

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caliber employees, and the limited ability

to raise capital.

Operation of the Sole Proprietorship

10. Because a sole proprietorship is not a sepa-

rate and distinct entity, no formalities must

be completed to form the business. Any in-

dividual who begins operating a business

without taking the necessary steps to form

another type of business entity is a sole pro-

prietor.

11. Common sole proprietorship formalities in-

clude filing a certificate of assumed name,

obtaining tax identification numbers and

sales tax permits, obtaining licenses to con-

duct businesses, and registering intellectual

property. When an individual or business

organization transacts business under any

name other than its own, it is said to be us-

ing an assumed name, fictitious name, or

trade name.

12. Requirements for assumed names are found

in state statutes. Generally, if the name is not

already in use and it complies with state

statutes, an application for assumed name

may be filed with the secretary of state re-

questing permission to use the name in that

state.

13. State statutes may also require that a notice

of assumed name be published in a local

newspaper prior to its use.

14. The purpose of state statutes regulating the

use of assumed names is to protect the pub-

lic and to provide the public with notice as

to the persons with whom they are actually

dealing.

15. Sole proprietors who hire employees must

obtain federal employer identification num-

bers (EINs) by filing a Form SS-4 with the

Internal Revenue Service.

16. States also require the use of tax identifica-

tion numbers, which may be obtained by fil-

ing an application with the appropriate state

authority.

17. Certain types of businesses must obtain li-

censes to comply with state statutes and lo-

cal ordinances.

18. When the business of a sole proprietorship

involves intellectual property, including in-

ventions, the use of words or symbols that

represent the business or its products, or cre-

ative material, it may be beneficial for the

sole proprietor to register patents, trade-

marks, or copyrights.

The Paralegal’s Role

19. Short of giving legal advice to the sole pro-

prietor, paralegals can assist with all aspects

of organizing a sole proprietorship. They are

often involved with helping to prepare the

required documents, such as the federal tax

identification number application (Form SS-

4), any required state tax identification

number applications, and any applications

for business licenses that may be required.

Paralegals may also prepare, file, and pub-

lish (if necessary) any certificate of assumed

or fictitious name that may be required. Par-

alegals who are familiar with requirements

for filing applications for intellectual proper-

ty may also assist in that area.

Resources

20. The Small Business Administration, state

and local government offices, state statutes,

the secretary of state offices, and the Internal

Revenue Service are the resources most of-

ten used by paralegals who are working with

sole proprietorships.

CASE BRIEFS

Thomas v. Colvin, 592 P.2d 982 (Okla. App.

1979)

Purpose: This case illustrates two ideas present-

ed in Chapter 2: first, the idea that the sole pro-

prietor is personally liable for his or her actions

and those of agents acting on behalf of the sole

proprietor; second, the idea that using an as-

sumed name (or d/b/a, as it is referred to in this

case) does not change the nature of the sole pro-

prietorship or the entity adopting the name.

CHAPTER 2 Sole Proprietorships 9

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Cause of Action: Conversion

Facts: The plaintiff in this case purchased an

automobile from the defendant, R. A. Coker,

d/b/a Sherwood Motors, on a credit plan. The

resulting security agreement and promissory

ration, of which defendant Coker was president.

Subsequently, defendant Coker called defendant

Bennie Colvin and hired him to repossess the

car, even though plaintiff was not in default on

the note. Plaintiff brought a conversion suit

possession of the automobile.

The jury returned a verdict against de-

fendant Coker, d/b/a Sherwood Motors, for

$1,625 in actual damages and $17,500 in puni-

tive damages. Defendant R. A. Coker, d/b/a

Sherwood Motors, appealed.

Defendant Coker argued on appeal that

the trial court erred because evidence failed to

establish that Colvin was an agent of “R. A.

Coker, d/b/a Sherwood Motors.” Coker claimed

to convert plaintiff’s car. Furthermore, defend-

ant Coker argued that because he was sued as R.

A. Coker, d/b/a Sherwood Motors, and not per-

sonally, he was not liable. The plaintiff argued

that even though defendant Colvin may not have

been the agent of “Sherwood Motors” in repos-

sessing the car, Coker’s participatioSn in the

repossession, both as an individual and as an

a sole proprietor under one or several names re-

main one person, personally liable for all of his

or her obligations?

Holding: Yes, defendant is personally liable.

Reasoning: A “d/b/a” designation does not cre-

ate a separate entity or limit the personal liability

of the sole proprietor in any way. An individual

who does business as a sole proprietor under

one or several names remains one person and is

personally liable for all of his or her obligations.

REVIEW QUESTIONS

1. What form of business ownership is the

most prevalent in the United States?

The sole proprietorship is the most

2. What form of business organization gener-

ates the most income?

The corporation is by far the biggest

generator of income in the United States,

3. Suppose that the Johnson Grocery Store is

a sole proprietorship owned by Jill John-

son. If Jill’s store manager, Ben, in the or-

dinary course of business, orders too many

tomatoes, can Jill Johnson refuse to pay for

the order?

Jill Johnson cannot refuse the order.

Why or why not?

A sole proprietor is responsible for the

4. Explain why an individual with limited fi-

nancial resources might choose to incorpo-

rate rather than operate a sole proprietor-

ship.

A sole proprietorship may require capi-

tal input greater than the individual sole

proprietor is capable of raising. The

5. Jim is contemplating going into business

for himself as a general contractor special-

izing in apartment complexes. For what

reasons may Jim choose to operate as a

sole proprietorship?

Jim may feel that he wants full man-

agement authority of his business, with-

out having a partner or other investors

to answer to. He may also be attracted to

10 PART I Guide for Instructors and Answers to Chapter Review Questions

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What factors may cause him to consider

incorporating or forming a limited liability

company?

Jim may be concerned with his exposure

to personal liability for his business obli-

6. If Lucy decides to start a tailoring business

from her home, what must she do before

she begins advertising under the name of

“Lucy’s Alterations”?

Lucy must check to be sure that the

name “Lucy’s Alterations” is available

for use, and she must check the re-

quirements in her state for using an as-

sumed name. She will probably be re-

7. Would a student who operates a lawn ser-

vice, working afternoons and weekends to

help pay tuition, be considered a sole pro-

prietor?

Yes

Why or why not?