The Law of Corporations and Other Business Organizations

Lecture Notes

Sole Proprietorship Defined
1. The sole proprietorship is an unincorporated
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 responsible
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 authority
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 Proprietorship
7. Advantages of doing business as a sole
proprietor include the full management authority
possessed by the sole proprietor, the
minimal formalities and reporting requirements
imposed on sole proprietorships, the
low cost of operating the sole proprietorship,
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 unlimited
liability of the sole proprietor for all
debts and obligations incurred by the business.
9. Other disadvantages to doing business as a
sole proprietorship include a lack of business
continuity, a lack of diversity in management,
difficulty in transferring the
sole proprietor’s business, the sole proprietor’s
limited ability to attract high8
caliber employees, and the limited ability
to raise capital.
Operation of the Sole Proprietorship
10. Because a sole proprietorship is not a separate
and distinct entity, no formalities must
be completed to form the business. Any individual
who begins operating a business
without taking the necessary steps to form
another type of business entity is a sole proprietor.
11. Common sole proprietorship formalities include
filing a certificate of assumed name,
obtaining tax identification numbers and
sales tax permits, obtaining licenses to conduct
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 using
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 requesting
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 public
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 numbers
(EINs) by filing a Form SS-4 with the
Internal Revenue Service.
16. States also require the use of tax identification
numbers, which may be obtained by filing
an application with the appropriate state
authority.
17. Certain types of businesses must obtain licenses
to comply with state statutes and local
ordinances.
18. When the business of a sole proprietorship
involves intellectual property, including inventions,
the use of words or symbols that
represent the business or its products, or creative
material, it may be beneficial for the
sole proprietor to register patents, trademarks,
or copyrights.
The Paralegal’s Role
19. Short of giving legal advice to the sole proprietor,
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 publish
(if necessary) any certificate of assumed
or fictitious name that may be required. Paralegals
who are familiar with requirements
for filing applications for intellectual property
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 often
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 presented
in Chapter 2: first, the idea that the sole proprietor
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 assumed
name (or d/b/a, as it is referred to in this
case) does not change the nature of the sole proprietorship
or the entity adopting the name.

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
note were assigned to B.F.T.C. Finance Corporation,
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
against defendants Colvin and R. A. Coker,
d/b/a Sherwood Motors, for their wrongful repossession
of the automobile.
The jury returned a verdict against defendant
Coker, d/b/a Sherwood Motors, for
$1,625 in actual damages and $17,500 in punitive
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
that he was not acting on behalf of Sherwood
Motors when he hired Colvin and directed him
to convert plaintiff’s car. Furthermore, defendant
Coker argued that because he was sued as R.
A. Coker, d/b/a Sherwood Motors, and not personally,
he was not liable. The plaintiff argued
that even though defendant Colvin may not have
been the agent of “Sherwood Motors” in repossessing
the car, Coker’s participatioSn in the
repossession, both as an individual and as an
agent of B.F.T.C., made him personally liable.
Issue: Does an individual who does business as
a sole proprietor under one or several names remain
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 create
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.