During this course we'll study five different entity types: sole proprietorships, partnerships, limited partnerships, corporations and limited liability companies.

Each entity type has its own set of rules. For example, a sole proprietorship is managed differently than a partnership. A partnership distributes liability differently than a corporation. And a corporation has fewer civil rights than a sole proprietorship. Because each entity type has strengths and weaknesses, which entity type is "best" will depend on the situation.

In addition to these five entity types, we'll study the general principles of agency law. Agency isn't an entity type, it's a body of law that often applies when people work together. We study it here because it forms the basis for many principles of business law and theory.

Most laws in this course are state laws. Because state laws vary, we'll learn the model codes, uniform laws and restatements. For corporations, we'll also cover Delaware law because most public companies are governed by Delaware law. 

As a handy reference, the table below provides the source of law for the five entity types we'll cover in this course as well as the common abbreviations.

A sole proprietorship is what we call a business owned and managed by a single individual without any legal formalities. This individual is called the proprietor. 

In a sole proprietorship, the business and the owner are legally indistinguishable. The proprietor has full control of the business and is fully liable for harms caused by the business. This means that the owner is personally responsible for its debts. If the business loses money, the creditors can sue the proprietor.

The key characteristics of a sole proprietorship are:

• Ownership: The business is owned by one person, known as the sole proprietor.
• Decision Making: The sole proprietor has complete control and authority over all business decisions. This makes it a flexible entity type.
• Liability: The owner is personally responsible for all debts and liabilities of the business. This means personal assets may be at risk to cover business obligations, including contract obligations and torts.
• Taxation: Profits and losses from the business are typically reported on the owner's personal income tax return. The business itself is not taxed separately.
• Formation: Sole proprietorships are the default entity, so unless the business meets the requirements to form another type of entity, it will be a sole proprietorship. That means that sole proprietorships are easy to form. They exist the moment you begin business. 
• Duration: The life of a sole proprietorship is closely tied to the life of the owner. If the owner decides to stop operating the business or passes away, the sole proprietorship ceases to exist.

Forming a Sole Proprietorship

Unlike other entity types we'll study, no formalities are required to form a sole proprietorship. It is simply the name given to someone operating a business on their own. A child's lemonade stand is a good example of a sole proprietorship.

Licenses & Permits

Just because a sole proprietorship has been formed, doesn't mean that it's operating legally. As noted above, a child's lemonade stand is a sole proprietorship, but you'll still need a food handler's permit. Permits and licenses are distinct legal requirements from entity formation.

This course is focused primarily on entities, so we'll cover only the basics of licensing and permitting. 

Most businesses will need a general business license to operate, and there may be industry specific licenses required for your business (like a liquor license or food services license). These licenses are required by state law, county regulations or city ordinances, and they vary widely. For example, running a resale business in Nebraska may need only a tax filing, while setting up a dentist office in Los Angeles requires more than a dozen government licenses and permits. 

You can typically find the requirements by checking the secretary of state's website for your state, your county's website and your city's website. Some states, like California, include all these requirements in one place.

Browse the California website here to see what types of licenses are required for various businesses: CalGold Home Page.

The Federal Small Business Administration (SBA) also provides guides on forming a business, which include licensing, tax identification and drafting a business plan. Browse the SBA's website here to get a sense of what is required: SBA New Business Guide.