Sole Proprietorships
H
AVE YOU EVER wanted to own and
operate your own business?
Perhaps you already do. Several forms
of business organizations exist, and the
simplest is a sole proprietorship. As
with any type of business, a sole
proprietorship has specific
characteristics, advantages, and
disadvantages.
Objective:
þ
Identify the characteristics, advantages, and disadvantages of a sole proprietorship.
Key Terms:
Ñ
business entity
sole proprietorship
unlimited liability
The Characteristics, Advantages, and
Disadvantages of a Sole Proprietorship
A sole proprietorship is a business entity with a single owner/operator. A business
entity is a professional organization offering something that has real existence. If you sell anything or have sold anything, you own or have owned a sole proprietorship.
CHARACTERISTICS OF A SOLE PROPRIETORSHIP
A sole proprietorship is the oldest, most common, and simplest form of business organization. This type of business is easy to set up and maintain. No registration with the state is
required, as it is with a corporation or a limited liability company (LLC).
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A sole proprietorship is relatively simple to manage and control. When you own and operate a
sole proprietorship, you have the
right to be the decision-maker for
the business. You are also personally responsible for assets, income
taxes, and business debts.
You can probably think of
many businesses that are sole proprietorships. If the name of a
business contains the owner’s
name, the business is likely a sole
FIGURE 1. Many farmers are responsible for their own business debts and
proprietorship. An example is
assets.
Fred’s Landscaping. Also, if the
business is operated by a single
person, it is often a sole proprietorship. Agriculture has many examples of this form of business organization. For instance, most farmers are sole proprietors.
TABLE 1. Characteristics of a Sole Proprietorship
• Oldest, most common, and simplest form of
business organization
• One person as decision-maker
• No registration with the state
• Easily set up and maintained
• Owner personally responsible for all assets
and liabilities
• Simple to manage and control
ADVANTAGES OF A SOLE PROPRIETORSHIP
Becoming a sole proprietor to sell something or to offer a service has many obvious benefits. Besides farms that sell their crops, businesses that provide simple services (e.g., lawn
mowing or snow removal) are often sole proprietorships. What might be some advantages to
working for yourself?
TABLE 2. Advantages of a Sole Proprietorship
• The owner is the boss.
• There are no legal formalities in forming or
dissolving the business.
• The money made belongs to the owner.
• Decisions can be made quickly.
• Start-up costs may be minimal.
• It is a good type of organization for a business
that will remain small, has limited exposure to
liability, and does not justify the expenses of
incorporating and ongoing corporate
formalities.
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Owning and operating your own business does not mean you cannot have employees. Sole
proprietorship means you are the owner and the manager. The business will have a direct
effect on your personal bank account. If the business profits a great deal, you will profit a great
deal. In contrast, if the business has trouble paying its employees or bills, you will be the last
one to receive any money.
DISADVANTAGES OF A SOLE PROPRIETORSHIP
For each advantage in a sole proprietorship, there is a disadvantage. While the sole proprietorship is the most popular form of business in the United States, it is also the type of business that fails most often. When you are the owner/operator, the business is dependent upon
you. If you leave on vacation for two weeks, you may have several matters to consider. For
example, if you pay your employees each week, who is going to write their checks in your
absence? Who is going to make management decisions, such as ordering new material or
allowing employees to take days off? If you work by yourself and get hurt, what income will
you have?
As a sole proprietor, you may find it difficult to raise capital or to get a loan from a bank to
start the business. When you do receive a loan, you will usually pay higher interest rates than
other types of businesses. When you become the owner, you assume unlimited liability, so
you may lose personal assets along with business assets to pay debts owed to others if the business is unsuccessful. In addition, the business will end when the owner dies. You will have to
find your own health insurance and perhaps employees’ health insurance if you choose to provide this for them. You will also be responsible for withholding and paying taxes for yourself
and figuring the tax rate for employees.
TABLE 3. Disadvantages of a Sole Proprietorship
• It is difficult to raise capital to start the
business.
• The owner has unlimited liability.
• The business ends if the owner dies.
• The owner is responsible for the entire
business.
• The owner is responsible for personal health
insurance.
• The owner is responsible for withholding and
paying all income taxes.
• The owner must pay self-employment tax.
• The owner may have to register the business
name and pay local taxes.
EXAMPLES OF SOLE PROPRIETORSHIP SITUATIONS
Some examples of sole proprietorships and the situations they may encounter follow.
Example One
Duane is the owner of a small apiary supply business. When business prospects look good,
he orders $50,000 worth of wood, which he uses in creating merchandise. Unfortunately, a
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FURTHER EXPLORATION…
ONLINE CONNECTION: Sole Proprietorship
Many people spend more time at work than they do at home. As a result, they should enjoy their jobs.
Some people ensure that the boss is pleasant and that the environment is agreeable by working for themselves.
A sole proprietorship is relatively simple to manage and control, and it does not require registration
with the state. Although this type of business has numerous benefits, some disadvantages exist. As a
result, you should investigate business types before making a decision.
To find out more about sole proprietorships, visit the link below:
http://sbinformation.about.com/od/ownership1/a/soleproprietor.htm
sudden drop in demand occurs, and Duane cannot sell the items he has produced. Several
months go by, and the company that sold Duane the supplies is demanding payment. Because
Duane has not sold many of his finished products, he cannot pay the company. As a sole proprietor, Duane is personally liable for this business obligation. As a result, the business to
which Duane owes money can sue him, going after Duane’s business assets and his personal
property (e.g., his house, car, and personal bank account).
Example Two
Megan is the owner of a flower shop. One day Megan sends Marty, one of her employees,
out in the company-owned van to deliver some flowers. On the way, Marty runs into a car and
seriously injures the other driver. The injured driver sues Marty, claiming that Marty drove
over the yellow line and caused the accident. The driver also names Megan in the lawsuit as
the co–defendant. After a trial, the jury returns a large verdict against Marty and against Megan
as well because she is the business owner. Megan is liable because Marty was working for her
business and driving her company vehicle when he struck the other driver. Therefore, the
injured driver can go after all of Megan’s assets—business and personal.
Example Three
Matt owns three acres and uses those acres to plant a garden. He chooses to plant all the
acres in strawberries. The strawberries receive the perfect amount of moisture and sunshine,
and Matt has a bumper crop. As a matter of fact, Matt has so many strawberries that he
employs Charlie, Nathan, and Chris to help pick them and to run a stand to sell the fruit. Matt
is able to pay all his bills, including his employees’ wages, and he still receives a profit of
$32,000. Matt can use this money to buy seed for his next crop or to make other farm investments; he can choose to pocket all $32,000; or he can do a combination of both. Whatever he
decides, all of the profit belongs to Matt.
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Summary:
2
Owning your own business is easy. You may have realized you have been a sole
proprietor already. You may also have decided that you would like to become a sole
proprietor or that you would not because too much risk is involved in this type of
business structure. Being informed and making informed decisions is important
when it comes to personal liability. However, sole proprietorship is the most common business type in the United States. Many operators never have any trouble
with operations and liability issues.
As long as your business is not dangerous or too risky, you will find yourself
becoming successful when making the correct decisions. Being able to compare the
advantages and disadvantages of operating any business is important. Being able to
evaluate situations and to make decisions that protect you, as the sole proprietor, is
invaluable.
Checking Your Knowledge:
´
1. What does sole proprietor mean?
2. What are three advantages of a sole proprietorship?
3. What are three disadvantages of a sole proprietorship?
4. Name one way in which to identify a sole proprietorship.
5. Define unlimited liability.
Expanding Your Knowledge:
L
Interview the owner of a sole proprietorship in your area. Ask about the benefits
and problems associated with that form of business. Ask the business owner why he
or she chose the sole proprietorship structure.
Web Links:
:
Doing Business as a Sole Proprietor
http://www.poznaklaw.com/articles/solep.htm
Sole Proprietorship
http://www.entrepreneur.com/encyclopedia/term/82652.html
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