Assume that 3 students want to open a recreational cannabis shop in which they will sell various products including flower, concentrates and edibles such as gummies. What form of business organization should they use, if any? Why? Which form of business organization should they avoid?

*** use info below for answer***

What Is a Sole Proprietorship?

A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who payspersonal income tax on profits earned from the business.

A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. As such, these types of businesses are very popular among sole owners of businesses, individual self-contractors, and consultants. Many sole proprietors do business under their own names because creating a separate business or trade name isn't necessary.

Key Takeaways

• A sole proprietorship is an unincorporated business with only one owner who pays personal income tax on profits earned.
• Sole proprietorships are easy to establish and dismantle, due to a lack of government involvement, making them popular with small business owners and contractors.
• Many sole proprietorships end up getting restructured into an LLC, in sync with the company's expansion.

Understanding Sole Proprietorship

A sole proprietorship is very different from corporations (Corp.) , Limited Liability Companies (LLCs), or limited Liability Partnerships ( LLPs), in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.

For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business's owner.

The main benefits of the sole proprietorship are the pass-through tax advantage mentioned before, the ease of creation, and the low fees of creation and maintenance. The disadvantages of a sole proprietorship are theunlimited liability that goes beyond the business to the owner, and the difficulty in getting capital funding, specifically through established channels, such as issuing equity and obtaining bank loans or lines of credit. Thus, entrepreneurs begin as an entity with unlimited liability. As the business grows, they often transition to a limited liability entity, such as an LLC or LLP, or an corporatione.g. S Corp, C Corp, or Benefit Corp.

Limited, General, and Joint Venture Partnerships: An Overview

U.S. businesses can be formed as sole proprietors, partnerships, qualified joint ventures, corporations,limited liability companies, trusts, orestates. Variations within these categories can exist and will depend on each individual situation. Here we explore the definitions and differences of limited, general, andjoint venture partnerships.

In general, apartnership is a business agreement between two or more people who are called partners. Partners have an interest in the business for which they are associated. Interests can vary depending on the focus and objective of the business.

Any type of business agreement between two or more people can be considered a partnership. Business and tax law has a clear designation for limited partnerships within the partnership line of business and allows that limited liability companies be classified as partnerships as well. General partnerships and joint venture partnerships can also be created along with several other types of partnerships.

Comprehensively, partnerships have the flexibility to be structured as they choose under their own partnership agreements. Each individual partnership is usually governed by a partnership agreement that fully details all of the business's operational provisions and activities. Typically, the terms general partner and limited partner in all types of partnerships will refer to liability, with general partners pledging their own personal assets while limited partners having limited liabilities.

Taxation of Partnerships

Partnerships do not pay taxes. Partnerships must file IRS Form 1065 which details their income, expenses, and profits. Annually, partnerships must also provide all partners in the partnership with aSchedule K-1 which details each partner's individual taxable income for tax filing purposes.1

Key Takeaways

• Any type of business agreement between two or more people can be considered a partnership.
• Partnerships do not pay taxes but they must file IRS Form 1065 and provide each partner with a Schedule K-1 detailing each partner's taxable income for individual tax filing purposes.
• Partnerships can be structured in various ways. Limited partnerships, general partnerships, and joint venture partnerships are three ways a company may choose to organize its partnership.

Limited Partnership (LP)

Business law requires that alimited partnership include general partners and limited partners. General partners have unlimited liability for all partnership debts while limited partners are limited to only the amount of money or property that they invest. General partners usually assume full management control of the entity. Limited partners may have some involvement in management and advisory but are usually just interested in a return on their investment. The specific rights and responsibilities of all partners are detailed in the partnership agreement. 2

General Partnership (GP)

Ageneral partnership is a partnership between two or more people who share in the profits and liabilities of a company. This can be as informal as a verbal agreement made over coffee or a formalized contractual agreement between partners. There are not necessarily any specific requirements for business structure or governance, other than the partners have to file Form 1065 and distribute Schedule K-1s.1 It is entirely up to the partners to define how the general partnership is to be run.

Typically, a general partnership will be structured with unlimited liability for each of the partners. This backs the solvency andliability of the partnership with the partners' personal assets.

Joint Venture (JV) Partnership

Joint ventures can exist for multiple purposes. Joint ventures may or may not be partnerships depending on the agreement of the collaborating parties. If a joint venture is structured as a partnership under business law then it must file a Form 1065 and report individual profits through a Schedule K-1 for taxation purposes.1

Joint ventures can be more loosely structured through contractual agreements rather than partnership designations. Entities may enter into a contractual joint venture agreement to combine resources, operations, and activities for a specific goal. If not organized as a partnership, the joint venture agreement will detail the specific provisions which both parties agree to.

Other Types of Partnerships

Limited partnerships, general partnerships, and joint venture partnerships are only three ways a company may choose to organize its partnership. Overall, partnerships can be structured in many different ways. Some other examples of partnership structures include the following.

Limited Liability Company (LLC)

Limited liability companies are created with members that are not personally liable for the company's debts. Limited liability companies can elect to be partnerships. In fact, multi-member LLCs are considered partnerships by default.3 An LLC that is designated as a partnership is not taxed and must comply with Form 1065 and Schedule K-1 requirements.4

Limited Liability Partnership (LLP)

Limited liability partnerships are usually structured with protection for partners' personal assets. An LLP will be governed by its partnership agreement. In most cases, an LLP is built to segregate liabilities of partners, limiting personal asset liability to only partners liable for specific actions. This type of partnership can ensure that not all partners have personal liability for the acts of other partners.