Appendix C: Forms of Business Organization

Business

1. From the details given, we get to know that John Hansen is the sole proprietor of Hansen sporting goods. He also owns a house on which a mortgage is taken. Nothing in the question mentions that the house or the mortgage is related to the retail store of the sole proprietorship. However, we also know that sole proprietorship does not have a separate identity from that of the sole proprietor. Sole proprietor is said to have unlimited liability. He shall be liable to the extent of his personal assets also. Thus, the house and the mortgage shall not find a place in the financial statements of the retail store. However, this shall be considered to the financial position as sole proprietor is no different from the sole proprietorship concern.

a. Calculate partner's share of net income: img As we are not provided with any details about expenses, the figure shown as net income is divided among the partners equally. b. Partners would pay tax on their share of net income and not on the amount of assets withdrawn by them. The two figures might differ substantially. But the figure to be considered for the purpose of payment of income tax is the share allocated to the respective partners. c. A statement of partner's equity is prepared in order for the partners to know the changes in their capital accounts during the year and where do they stand at the end of the year. To know the same, any net income and additional investments made are added to the opening balances of the partners and withdrawals are subtracted from the respective total to arrive at the closing balance. img

Sarah Miller is a sole proprietor and wishes to join in a partnership. The following are the advantages and disadvantages that she would have by getting into the partnership: Advantages: 1. More capital can be brought into the business, as there are more partners. 2. The borrowing capacity increases. 3. Loss can be shared between the partners as against the case of sole proprietorship where the sole proprietor has to bear losses all alone. However, the following disadvantages also pop up at the same time: 1. There could be disagreement and resulting in friction between partners over various issues. 2. The liability of the partners is unlimited. Each partner is jointly and severally liable for the debts of the partnership. 3. The partner shall be liable for the acts of the other partners. 4. Profits or income is also to be shared. Thus taking into consideration, the possible advantages and disadvantages, Sarah Miller should take a wise decision.

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