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Organizing a Business

SOLE PROPRIETORSHIPS

In 1901 pharmacist Charles Walgreen bought the drugstore in which he worked on the South Side of Chicago. Today Walgreen`s is the largest drugstore chain in the United States. If, like Charles Walgreen, you start on your own, with no partners or stockholders, you are said to be a sole proprietor. You bear all the costs and keep all the profits after the Internal Revenue Service has taken its cut. The advantages of a proprietorship

are the ease with which it can be established and the lack of regulations governing it. This makes it well-suited for a small company with an informal business structure. As a sole proprietor, you are responsible for all the business`s debts and other liabilities. If the business borrows from the bank and subsequently cannot repay the loan, the bank has a claim against your personal belongings. It could force you into personal bankruptcy if the business debts are big enough. Thus as sole proprietor you have unlimited liability.

PARTNERSHIPS

Instead of starting on your own, you may wish to pool money and expertise with friends or business associates. If so, a sole proprietorship is obviously inappropriate. Instead, you can form a partnership. Your partnership agreement will set out how management decisions are to be made and the proportion of the profits to which each partner is entitled. The partners then pay personal income tax on their share of these profits.

Partners, like sole proprietors, have the disadvantage of unlimited liability. If the business runs into financial difficulties, each partner has unlimited liability for all the business`s debts, not just his or her share. The moral is clear and simple: ¬Know thy partner. ­

Many professional businesses are organized as partnerships. They include the large accounting, legal, and management consulting firms. Most large investment banks such as Morgan Stanley, Salomon, Smith Barney, Merrill Lynch, and Goldman Sachs started life as partnerships. So did many well-known companies, such as Microsoft and Apple Computer. But eventually these companies and their financing requirements grew too

large for them to continue as partnerships.

SOLE PROPRIETOR

Sole owner of a business which has no partners and no shareholders. The proprietor is personally liable for all the firm`s bligations.

PARTNERSHIP

Business owned by two or more persons who are personally responsible for all its liabilities.