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©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
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?
SUGGESTED ANSWERS TO
PRACTICAL PROBLEMS
The Practical Problem in this chapter asks the
student to research the laws of the student’s
home state to answer several questions about
formalities that must be followed by sole
1. State statutes (See text, Exhibit 2-7.)
2. Office of the secretary of state or other ap-
propriate state authority (See text,
Appendix A.)
3. State tax authority (Links to state tax au-
thorities may be found at the website of the
EXERCISE IN CRITICAL
THINKING
The Exercise in Critical Thinking for Chapter 2
asks students to consider the characteristics and
traits that contribute to the success of a sole pro-
prietor.
Exercise:
It is estimated that at least 30 percent
of small businesses fail within the
SUGGESTIONS AND SAMPLE
DOCUMENTS FOR THE WORK-
PLACE SCENARIO
The Workplace Scenario for Chapter 2 asks stu-
dents to assist with the legal formalities for cli-
ent Bradley Harris, who will be operating a
cation for a federal employer identification
number, and an application for a state tax identi-
fication number. Sample documents for several
of the Workplace Scenarios throughout the text
may be found in the appendices to this Instruc-
tor’s Manual. For Chapter 2, the sample docu-
ments include the following:
CHAPTER 2 Sole Proprietorships 11
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or
service or otherwise on a password-protected website for classroom use.
• Appendix B, application for certificate of
assumed name (with cover letter)
• Appendix C, application for federal employ-
er identification number
Downloadable forms for several states are avail-
able on the CourseMate website that accompa-
nies this text at http://www.cengagebrain.com,
or from the website of the secretary of state.
Requirements for state tax identification
numbers vary too much among the states to
make a sample form useful.
Students will need to obtain the current
information from the state tax authority in their
home state to determine the proper procedures.
Links to state tax authorities may be found at the
website of the Federation of Tax Administrators
at http://www.taxadmin.org.
Students can complete the Form SS-4
for this assignment by filling in the online form
at http://www.irs.gov and printing the form
without submitting it.
ADDITIONAL EXERCISE 1
Rather than completing the documents for the
Workplace Scenario, students may be asked to
imagine that they are sole proprietors and to
complete the necessary formalities for their own
fictitious sole proprietorship within their state.
