Sole Proprietorship

Types of Businesses

• Sole Proprietorship• Partnership• Corporation

Sole Proprietorship• the most common form of business organization• business

– an organization that sells goods and services owned by one person or family

• it is also the oldest and easiest to form• they are concentrated in small businesses

– repair shops– small retail outlets– service providers– painters, plumbers, lawn -care

• there are over 16 million in the US• 3 out of 4 businesses in the U.S. are sole proprietorship

SP

• Sole proprietorship is also called a proprietorship

• the owner/ manager is called a proprietor• they perform the everyday tasks of running

the business• a proprietorship may also hire other people to

be managers– Workers that run the business– but they are employees not owners

SP 2• Sometimes the owner of the business is required

to have a license to operate a business in a particular field

• the owner (proprietor) furnished expertise, money, equipment, and management (capital)

• because of this the proprietor gets all the profits from the business

• The proprietor has full claim to the assets– property owned by the business– this is if there are no debts

SP3• The sole proprietorship is the simplest business form

under which one can operate a business. • The sole proprietorship is not a legal entity. • It simply refers to a person who owns the business and

is personally responsible for its debts.• Most sole proprietorships earn modest incomes.• Many proprietors run their businesses part-time.• While it is the most commonly instituted business, it

also has the highest rate of failure– in some years up to 50%, but on a regular basis it is around

the correct figure•

Characteristics of SP

Debt

• If there are debts owed creditors have first claim against the company assets.

• creditors are those whom money is owed

• the first creditor in everything is the government

• this comes in the form of taxes

Bankruptcy

• A company can hold off creditors by entering bankruptcy

• bankruptcy is the legal nonpayment of financial obligations

• these laws are all regulated by federal government laws

• Many businesses do not want to enter bankruptcy because it will hurt their credit and effect any future business ventures.

There are two types of bankruptcy• Personal Bankruptcy• - where the individual goes bankrupt• these are covered under Chapter 7 and Chapter 13 in

the Federal bankruptcy law• Business Bankruptcy• - where a business goes bankrupt• this is covered under Chapter 11• business can enter bankruptcy on their own • called voluntary bankruptcy• or be forced into bankruptcy by creditors called

involuntary bankruptcy

Advantages of a Sole proprietorship

• Owner is the Boss• Owner Receives all Profits• Owner personally knows employees and

customers• Owner can act Quickly in Decision Making• Legal Advantages• Owner usually pays less taxes than a

corporation

Owner is the Boss

• there is pride and satisfaction in being one’s own boss

• the proprietor can be inventive and creative in working out ideas to make the business a success

• the owner does not have to rely on the say of someone else to get something done

Owner Receives all Profits

• all money after expenses goes to the owner.• the expenses are payment to creditors, salaries, and

taxes• the owner is more likely to work overtime and to

think continually of how to make the business better • since an owner will get all the profits this is an

incentive for an owner to make the business operations as efficient as possible

Owner personally knows employees and customers

• because most proprietorships are small, the owner and employees know one another personally

• the relationship can lead to mutual understanding and feeling of loyalty because they work side by side

• since the proprietor works in a community and is at work all the time, they have a tendency to know all their customers

• they will know what their customers want and the best means of supplying their wants

• proprietors also become leaders of the community because people in the community are their customers.

Owner can act Quickly in Decision Making

• Sole proprietorships can make decisions without consulting others

• this allows them to act promptly when the need arises• buying merchandise and equipment• change location• design credit terms• management flexibility allows the business to adjust

to changes quicker than if they had to deal with other owners.

Legal Advantages• a sole proprietorship can usually begin and end business activities

without legal formalities.• the business can be organized without a lot of legal documents or

government restrictions.• this means that the proprietorship is free from red tape• usually the owner must meet a few legal requirements

– registering a business or trade name– taking out any necessary licenses

• this is to make sure that two businesses don’t take out the same name

• local governments requirement restaurants, motels, retail stores, and repair shops have certain licenses before they open.

• some of these requirements is that a business have liability insurance

Owner usually pays less taxes than a corporation

• - the personal income tax is less than the corporate tax

Disadvantages of a Sole Proprietorship

• Owner may lack necessary skills and abilities• Owner may Lack Proper funds• Owner bears all losses• Illness or death may close the business

Owner may lack necessary skills and abilities

• each person has special skills and abilities.– Selling– talented at purchasing goods– keeping records– supervision– getting proper financing

• All of these abilities are important to the success of a business• A proprietor may not be good in all of these abilities.• No one can do everything well • there is a wide range of managerial and operational tasks .• even if a person is good at everything at a small level, once the business

grows the owner may not be able to handle operational tasks with proper efficiency.

Owner may Lack Proper funds

• Additional funds needed to run the business (capital) are always needed.

• Financial assistance on a large scale may be difficult to obtain by a single owner

• Therefore the expansion of business may be slowed by the lack of capital.

• business must operate with the funds available to a single owner.

• these funds are limited

Owner bears all losses

• Sole proprietorships assume a great deal of risk.• While the proprietor gets all the profits if the business fails they

are responsible for all the losses.– Called unlimited liability

• if the business fails creditors have claim to all the business assets (anything in the business that has a value.

• if the assets do not equal the debts, creditors are entitled to the owners personal property until the debt is cleared

• thus the proprietorship may not loose property to the business but personal property such as home and car.

• if a person files Chapter 11 they may be able to hold on to some of these personal possessions until the debts are paid.

Illness or death may close the business

• a sole proprietorship lacks long term continuity • The continuing operation of a sole

proprietorship depends on the longevity of the proprietor.

• If the owner becomes unable to work because of illness or dies, the business would have to close down..

• Change in personal interests can also close down a proprietorship