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choices intelligently and effectively. After discussing the various business forms, we will revisit our
entrepreneurs and analyze their choices.
Business Forms
Two of the most popular business forms could be described as the default forms, because the law will
deem a business to be operating under one of these forms unless it makes an affirmative choice
otherwise. The first of these forms is the sole proprietorship. Unless the businessperson has actively
chosen another form, the individual operating his or her own business is considered to be a sole
proprietor. Two or more persons operating a business together are considered a partnership (or general
partnership), unless they have elected otherwise. Both of these forms share the characteristic that for
all intents and purposes they are not entities separate from their owners. Every act taken or obligation
assumed as a sole proprietorship or partnership is an act taken or obligation assumed by the business
owners as individuals.
Many of the rules applicable to the operation of partnerships are set forth in the Uniform
Partnership Act, which has been adopted in one form or another by 49 states. That Act defines a
partnership as “an association of two or more persons to carry on as co-owners a business for profit.”
Notice that the definition does not require that the individuals agree to be partners. Although most
partnerships can point to an agreement among the partners (whether written or oral), the Act applies
the rules of partnership to any group of two or more persons whose actions fulfill the definition. Thus,
the U.S. Circuit Court of Appeals for the District of Columbia, in a rather extreme case, held, over the
defendant‟s strenuous objections, that she was a partner in her husband‟s burglary “business” (for
which she kept the books and upon whose proceeds she lived), even though she denied knowing what
her husband was doing nights. As a result of this status, she was held personally liable for damages to
the wife of a burglary victim her husband had murdered during a botched theft.
In contrast, a corporation is a legal entity separate from the legal identities of its owners, the
shareholders. In the words used by James Thurber to describe a unicorn, the corporation is “a mythical
beast,” created by the state at the request of one or more business promoters upon the filing of a form
and the payment of the requisite modest fee. Thereupon, in the eyes of the law, the corporation
becomes for most purposes a “person” with its own federal identification number! Of course, one
cannot see, hear, or touch a corporation, so it must interact with the rest of the world through its
agents, the corporation‟s officers and employees.
Corporations come in different varieties. The so-called professional corporation is available in most
states for persons conducting professional practices, such as doctors, lawyers, architects, psychiatric
social workers, and the like. A subchapter S corporation is a corporation that is the same as a regular
business corporation in all respects other than taxation. These variations are discussed later.
A fourth form of business organization is the limited partnership, which may best be described as a
hybrid of the corporation and the general partnership. The limited partnership consists of one or more
general partners—who manage the business, much in the same way as do the partners in a general
partnership—and one or more limited partners, who are essentially silent investors with very little
control over business operations. Like the general partnership, limited partnerships are governed in