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The death of the owner terminates the legal existence of a sole proprietorship. Thus, the possibility of the owner’s death may cloud relationships between a business and its creditors and employees. It is important that the owner have a will, because of the business minus its liabilities will belong to her or his heirs. In a will, a sole proprietor can give an executor the power to run the business for the heirs until they can take it over or it can be sold.
Another contingency that must be provided for is the possible incapacity of the sole proprietor. For example, if she or he were badly hurt in an accident and hospitalized for an extended period, the business could be ruined. A sole proprietor can guard against this contingency by giving a competent person legal power of attorney to carry on in such circumstances.
In some cases, circumstances argue against selecting the sole proprietorship option. If the nature of a business involves exposure to legal liability-for example, the manufacture of a potentially hazardous product or the operation of a child-care facility-a legal form that provides greater protection against personal liability is likely to be a better choice. For most companies, however, various forms of insurance are available to deal with the risks of a sole proprietorship, as well as those related to partnerships.
THE PARTNERSHIP OPTION
A partnership is a legal entity formed by two or more co-owners to operate a business for profit. Because of a partnership’s voluntary nature, owners can set it up quickly, avoiding many of the legal requirements involved in creating a corporation. A partnership pools the managerial talents and capital of those joining together as business partners. As in a sole proprietorship, however, the owners share unlimited liability.
QUALIFICATIONS OF PARTNERS
Any person capable of contracting may legally become a business partner. Individuals may become partners without contributing capital or having a claim to assets at the time of dissolution: such persons are partners only in regard to management and profits. The formation of a partnership involves consideration not only of legal issues but also of personal and managerial factors. A strong partnership requires partners who are honest, healthy, capable, and compatible.
Operation a business as a partnership has benefits, but it is also fraught with potential problems. Most experts discourage the use of partnerships as a way to run a business, even though there are good and bad qualities associated with this form of organization (see Exhibit 8.3). The benefits of partnerships include the ability to share the workload as well as the emotional and financial burdens of the enterprise and to buy management talent that might otherwise break the budget. And it should not be overlooked that partners can add companionship to life in a small business.