Chapter
Chapter 8
• Section 1
Sole Proprietorships
Preview
Objectives
Section Focus
Key Terms
After studying this section you will be able to:
A business is an economic institution
that seeks a profit by allocating
resources to satisfy customers. Sole
proprietorships are the most common
form of business in the United States.
They are easy to establish and offer
owners both the benefits and
drawbacks that come with full control
of a business.
business organization
sole proprietorship
business license
zoning law
liability
fringe benefit
1. Explain the characteristics of sole
proprietorships.
2. Analyze the advantages of a sole
proprietorship.
3. Analyze the disadvantages of a sole
proprietorship.
ntrepreneurs must make many decisions
as they start up new businesses. One of
the first decisions they face is what form of
business organization best serves their
interests. A business organization is an
establishment formed to carry on commercial enterprise. In other words, a business
organization is a company, or firm. Sole
proprietorships are the most common
forms of business organization.
E
Advantages of
Sole Proprietorships
While you need to do more than just hang
out a sign to start your own business, a sole
proprietorship is simple to establish. It also
offers the owner numerous advantages.
BU
business organization
an establishment
formed to carry on
commercial enterprise
sole proprietorship a
business owned and
managed by a single
individual
Personal pride
motivates many sole
proprietors.
S
K
T
Entrepreneurs To build understanding of
entrepreneurs, ask students to complete a Venn
diagram like the one at the right on the advantages and disadvantages of sole proprietorships.
Point out that a Venn diagram can be used to
illustrate two sides of an issue. Have students
list advantages in one circle; disadvantages in
the other circle; and characteristics that can be
both in the overlap section.
Vocabulary Builder Have students
write an extended definition for each
key term without including the term
itself. Group students into pairs in
which one student reads a definition
and the other student offers a question that the definition would answer.
(Extended definition: Payments to
employees other than salary, such as
vacation and retirement pay.
Question: What are fringe benefits?)
Teaching the Main Concepts L3
I L D I NG
C ON CE P
they have ever received payment for
shoveling snow, baby-sitting, or caring for vacationing families’ pets.
Explain that any such businesses
they operated by themselves were
examples of sole proprietorships.
Lesson Plan
Graphing the Main Idea
EY
Objectives You may wish to call
students’ attention to the objectives
in the Section Preview. The objectives are reflected in the main headings of the section.
Bellringer Ask students whether
The Role of Sole
Proprietorships
A sole proprietorship is a business owned
and managed by a single individual. That
person earns all of the firm’s profits and is
responsible for all of the firm’s debts. This
type of firm is by far the most popular in
the United States. According to the Internal
Revenue Service, about 75 percent of all
businesses are sole proprietorships. Most
sole proprietorships are small, however. All
together they generate only about 6 percent
of all United States sales.
Many types of businesses can flourish as
sole proprietorships. Look around your
town. Chances are good that your local
bakery, your barber shop or hair salon,
your bike-repair shop, and the corner store
are all sole proprietorships.
Sole Proprietorships
Section Reading Support Transparencies A template and the answers for this graphic organizer
can be found in Chapter 8, Section 1 of the Section
Reading Support Transparency System.
1. Focus Explain to students that sole
proprietorships are the most common
business organization. Ask students to
speculate on why people choose to run
their own businesses.
2. Instruct Discuss with students the
advantages and disadvantages of sole
proprietorships, and ask them to weigh
one against the other. Ask students
whether they think that most Americans
feel that the advantages outweigh the
disadvantages.
3. Close/Reteach Remind students that
the trade-off in a sole proprietorship is
absolute control weighed against
absolute responsibility. Ask students to
create a personality profile of a successful sole proprietor.
Guided Reading and Review
Unit 3 folder, p. 2 asks students to
identify the main ideas of the section
and to define or identify key terms.
185
Chapter
Chapter 8
• Section 1
To start a new business, a sole proprietor
must meet a small number of government
requirements, which can vary from city to
city and state to state. Typically, sole
proprietors must meet the following
minimum requirements:
Figure 8.1 The Entrepreneurial Spirit
Meeting NCEE Standards
Use the following benchmark activity
from the Voluntary National Content
Standards in Economics to evaluate
student understanding of Standard 14.
Identify an entrepreneur and
describe how the entrepreneur’s
decisions affect job opportunities.
Entrepreneurs . . .
It takes a certain
type of personality to
start up a business.
Entrepreneurs
Describe some times
when you exhibited
entrepreneurial
spirit.
L3
Have students interpret the circle
graphs on this page to answer the following questions:
1. How much money do the vast majority
of proprietorships earn? (under
$25,000)
2. Which type of proprietorship is most
common? (services) Which types are
least common? (manufacturing,
wholesale trade, finance and insurance)
★
★
★
★
★
★
★
Seek out responsibility
Are willing to take risks
Believe in themselves
Desire to reach their full potentials
Have high energy levels
Are upbeat and optimistic
Look toward the future rather than
the past
★ Value achievement over money
★ Maintain flexibility as they face
new challenges
★ Are strongly committed to their goals
Ease of Start-Up
business license
authorization to start a
business issued by the
local government
Easy start-up is one of the main advantages
of the sole proprietorship. With just a
small amount of paperwork and legal
expense, just about anyone can start a sole
proprietorship.
1. Authorization Sole proprietors must
obtain a business license, which is an
authorization from the local government. Certain professionals, such as
doctors and day-care providers, may also
be required to obtain a special license
from the state.
2. Site permit If not operating out of the
home, a sole proprietor must obtain a
certificate of occupancy to use another
building for business.
3. Name If not using his or her own name
as the name of the business, a sole proprietor must register a business name.
This paperwork often takes only a day or
two to complete. The most difficult part of
starting a new business is coming up with a
good idea!
L2
Ask students to change each of the
headings and subheadings in this section into a question. Then ask them to
skim the text under the headings to
answer their questions before reading
the section. LPR
Figure 8.2 Characteristics of Proprietorships
PHSchool.com
1%
1%
Under $25,000
5%
$25,000–$49,999
Web Code: mng-3082
By Type
By Size of Receipts
10%
2%
13%
$50,000–$99,999
Learning Styles Activity
Learning Styles Lesson Plans folder,
p. 21 has student groups analyze the
concept of sole proprietorship by creating want ads and role-playing an
interview.
$100,000–$499,999
2%
9%
5%
Manufacturing
Transportation
Wholesale trade
$500,000–$999,999
$1,000,000 or more
Construction
12%
67%
12%
53%
Retail trade
Finance and insurance
Real estate
5%
3%
Services
Other
Transparency Resource Package
Economics Concepts, 8A:
Business License Application
Note: Because of rounding, totals may be less or greater than 100 percent.
Source: Statistical Abstract of the United States, 2004–2005
Most sole proprietorships take in relatively small amounts of money, or receipts. Many proprietors run their
businesses part-time.
Specialization What percentage of sole proprietorships is engaged in retail trade? Why might more sole proprietors be engaged in services rather than manufacturing?
$
Answer to . . .
Building Key Concepts Students
should describe entrepreneurial
ventures they’ve partaken in.
Building Key Concepts 12 percent,
students may suggest that services
have lower start-up costs and
a lower overall requirement for
capital.
186
Econ 101: Key Concepts Made Easy
Entrepreneurs One of the key concepts in
Section 1 is liability. To help students understand
this concept, ask them to think of a sole proprietorship as being somewhat like a family. Rent,
mortgages, credit cards, and taxes are all examples of the liabilities—financial obligations—of a
family. Just as the head of a family is personally
responsible for that family’s debts, a sole proprietor is personally responsible for the debts of the
business.
Chapter
Chapter 8
Relatively Few Regulations
A proprietorship is the least-regulated form
of business organization. Even the smallest
business, however, is subject to some regulation, especially industry-specific regulations. For example, a gourmet soft pretzel
stand would be subject to health codes, and
a furniture refinishing business would be
subject to codes regarding dangerous
chemicals.
Sole proprietorships may also be subject
to local zoning laws. Cities and towns often
designate separate areas, or zones, for residential use and for business. Zoning laws
may prohibit sole proprietors from operating businesses out of their homes.
Otherwise, these small businesses face
few legal requirements. Because they
require little legal paperwork, sole proprietorships are usually the least expensive
form of ownership to establish.
Sole Receiver of Profit
A major advantage of the sole proprietorship is that the owner gets to keep all
profits after paying income taxes. Potential
profits motivate many people to start their
own businesses. If the business succeeds,
the owner does not have to share the
success with anyone else.
L4
You may wish to have students add
the following to their portfolios. Ask
them to research an American entrepreneur, either a contemporary or a
historical figure, who started as a
sole proprietor, and write a brief biographical essay detailing that person’s accomplishments. Biographical
essays should include the following
information: the subject’s background, business idea or inspiration,
funding or lack of it, steps toward
the goal, and a description of successes or failures. GT
What are the benefits of running a business from home?
Disadvantages of
Sole Proprietorships
As with everything else, there are trade-offs
with sole proprietorships. The independence of a sole proprietorship comes with a
high degree of responsibility.
zoning law law in a city
or town that designates
separate areas for
residency and for
business
liability the legally
bound obligation to pay
debts
Unlimited Personal Liability
Full Control
Another advantage of sole proprietorship is
that sole proprietors can run their businesses as they wish. This means that they
can respond quickly to changes in the
marketplace. Such a degree of freedom
appeals to entrepreneurs. Fast, flexible
decision making allows sole proprietorships to take full advantage of sudden
opportunities.
Easy to Discontinue
Finally, if sole proprietors decide to stop
operations and do something else for a
living, they can do so easily. They must, of
course, pay all debts and other obligations
like taxes, but they do not have to meet any
other legal obligations to stop doing
business.
• Section 1
The biggest disadvantage of sole proprietorship is unlimited personal liability.
Liability is the legally bound obligation to
pay debts. Sole proprietors are fully and
personally responsible for all their business
debts. If the business fails, the owner may
have to sell personal property to cover any
outstanding obligations.
For example, let’s say you took out a
loan to buy a ride-on lawn mower as part
of your landscaping business. Even if you
don’t make enough money to stay in
business, you must still repay the loan for
the lawn mower. Business debts can ruin a
sole proprietor’s personal finances.
Economics Assessment Rubric
Economics Assessment Rubrics folder,
pp. 6–7 provides sample evaluation
materials for a writing assignment.
L3
(Enrichment) Organize the class
into four or more groups. Each
group will be responsible for one
segment of the community (for
example, a business district, a residential neighborhood, the area
around the school, an industrial district). Have each group use community resources to determine what
types of businesses are and are not
allowed in each area of the community. Students should also investigate
the area’s zoning laws and determine
why certain businesses are restricted
from certain areas. A representative
from each group should make a
short oral presentation to the class.
L3
Limited Access to Resources
If your landscaping business takes off and
grows quickly, you might need to expand
Block Scheduling Strategies
Consider these suggestions to take advantage of
extended class time:
■ Extend the Student Portfolio activity on this
page by having an Entrepreneurs’ Corner in the
school lobby or cafeteria. During class time,
encourage students to create posters or handouts
illustrating each entrepreneur’s activities.
Additional class time will be needed to set up the
display, or student volunteers may set it up as an
after-school project.
■ Have the class examine a sole proprietor’s
business plan. After students have had a chance to
read through the plan, ask them to suggest modifications that they think would make the business
more successful.
Have students make brief (two- to
three-minute) presentations on
“Why I Would (or Would Not) Want
to be a Sole Proprietor.” Explain that
the presentations should show an
understanding of the advantages and
disadvantages of sole proprietorship.
Answer to . . .
Photo Caption Students may note
that there would be no need to rent
or buy space.
187
Chapter
Chapter 8
• Section 1
GTE
Guide to the Essentials
Chapter 8, Section 1, p. 33 provides
support for students who need additional review of the section content.
Spanish support is available in the
Spanish edition of the guide on p. 33.
Quiz Unit 3 folder, p. 3 includes
questions to check students’ understanding of Section 1 content.
Presentation Pro CD-ROM
Quiz provides multiple-choice
questions to check students’ understanding of Section 1 content.
Typing in the
Web Code when prompted will
bring students directly to the
article.
Answers to . . .
Section 1 Assessment
1. A business organization is an establishment formed to carry on a commercial enterprise.
2. A sole proprietorship is a business
owned and managed by one
individual.
3. Business licenses grant permission to
undertake and carry out business,
while zoning laws influence where
businesses may be located.
4. Sole proprietors are responsible for
all debts that the business may
acquire. They are said to have unlimited personal liability.
5. Most sole proprietorships are small,
so they have limited resources to allocate for benefits to both employees
and owners.
6. Students may suggest several of the
categories of aides, saying that a sole
proprietor could hire a staff and manage client contact. Students may also
mention desktop publishing specialists, who could run businesses from
their homes.
7. Student answers will vary but should
show self-understanding and an
understanding of entrepreneurship.
They may, for example, say that they
possess many of the traits and that
they would like to own a business
because it would be challenging and
provide a feeling of accomplishment.
188
your business by buying
more equipment. But as a
sole proprietor, you may
In the News Read more about
have to expand by paying
entrepreneurship in “Best Foot
for the equipment out of
Forward,” an article in The Wall Street
your own pocket. This is
Journal Classroom Edition.
because banks are sometimes
unwilling to offer financing
in the early days of a
The Wall Street Journal
business.
Many
small
Classroom Edition
business owners use all of
For: Current Events
their available savings and
Visit: PHSchool.com
other personal resources to
Web Code: mnc-3081
start up their businesses.
This makes it difficult or
impossible for them to
expand quickly.
fringe benefit payment
Physical capital may not be the only
other than wages or
factor resource in short supply. Human
salaries
capital may be lacking, too. A sole proprietor, no matter how ambitious, may lack
some of the skills necessary to run a
business successfully. All individuals have
strengths and weaknesses. Some aspects of
your business may suffer if your skills
don’t match the needs of the business. For
example, you may be great at sales, but not
at bookkeeping and accounting. You may
love working outdoors landscaping, but
hate to call on people to drum up business.
Section 1 Assessment
Key Terms and Main Ideas
1. What is a business organization?
2. What is a sole proprietorship?
3. What role do business licenses and zoning laws play in
sole proprietorships?
4. What kinds of liabilities are sole proprietors subject to?
5. Why do you think many sole proprietorships are able to
offer few fringe benefits to workers?
Applying Economic Concepts
6. Using the Databank Examine the graph “FastestGrowing Occupations” on page 537. Which of these
Finally, as a sole proprietor, you may
have to turn down work because you
simply don’t have enough hours in the day
or enough workers to keep up with
demand. A small business often presents
its owner with too many demands, and
that can be exhausting both personally
and financially.
Lack of Permanence
A sole proprietorship has a limited life. If a
sole proprietor dies or closes shop due to
retirement, illness, loss of interest in the
business, or for any other reason, the
business simply ceases to exist.
Sole proprietorships often have trouble
finding and keeping good employees. Small
businesses generally cannot offer the
security and advancement opportunities
that many employees look for in a job. In
addition, many sole proprietorships are
able to offer employees little in the way of
fringe benefits. Fringe benefits are payments
to employees other than wages or salaries,
such as paid vacation, retirement pay, and
health insurance. Lack of experienced
employees can hurt a business. Once again,
the flip side of total control is total responsibility: a sole proprietor cannot count on
anyone else to maintain the business.
Progress Monitoring Online
For: Self-quiz with vocabulary practice
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occupations do you think could operate successfully as
sole proprietorships? Explain your reasoning.
7. Try This Refer to Figure 8.1, “The Entrepreneurial Spirit,”
on page 186. How many of these traits do you have?
Would you like to start your own business someday?
Why or why not?
PHSchool.com
For: Simulation Activity
Visit: PHSchool.com
Web Code: mnd-3081
Progress Monitoring Online
For additional assessment, have students access
Progress Monitoring Online at Web Code: mna3085
Typing in the Web Code
when prompted will bring students directly
to detailed instructions for this activity.