Sole Proprietorship
Definition: A business that is owned by one individual. The owner makes all business decisions, receives all the profits or losses of the firm. He/she is legally responsible for the debts of the firms.
A sole proprietorship is the simplest business form. It is not a legal entity. In simple terms, it is where one person owns a business and is responsible for everything. For example if in a neighborhood you see a sign that says, "Bob's Barber Shop," there is a good chance this is a sole proprietorship assuming the owner is Bob.
Sole proprietorships are very common because they are so simple. They are easy to set up and have nominal costs compared to a corporation. The sets to starting a sole proprietorship are easy. The owner needs to register the name of the shop, secure a local licenses, and then they can be open and ready for business. If the business fails and has financial trouble, creditors can pursue a lawsuit against the owner. If the creditors win, the owner is responsible for paying the money out of pocket.
A sole proprietorship usually has the owner sign a contract in his/her name, because the sole proprietorship does not have a separate identity under the law. The sole proprietorship can have customers write check in the owner's name. For example, for "Bob's Barber Shop" customers may write checks to Bob Baker. Sole proprietorships can avoid formalities such as voting with partners on certain decisions. Several businesses start as a sole proprietor and move up into a more complex business.
Examples:
1. Local Restaurants
2. Hair Salons
3. Photography Studios
4. Freelance Writers
Examples in Indiana:
1. Flutter By Photography - maryjogreathouse.com
2. Snips - snips.in.com
3. Lazy Daze - lazydazecoffeehouse.com
Advantages of a Sole Proprietorship
1. Easy to form and dissolve - Sole proprietorships are simple to form and are the least expensive compared to other business types. The costs are minimal and the legal costs are limited to the license or permits.
2. All decisions are left up to the owner of the sole proprietor - The owner has complete control. Their are no power struggles and decisions are easily made since their is only one person involved. Their are no consultations required within a sole proprietorship.
3. Profit is only taxed once - The business is not taxed separately. This makes the tax requirements easy to fulfill and the tax rates are lower than other types of business firms.
Disadvantages of a Sole Proprietorship
1. Face unlimited liability - There is no legal separation between the business and the owner. The owner can be help personally responsible for the debts of the business or the actions done by employees.
2. Limited ability to raise funds - Raising money for a sole proprietor can be difficult. There is no stock available to be sold or bought and investors rarely invest. Additionally, banks are hesitant to give a sole proprietor a loan because the repayment is not very credible.
3. Ends with death or retirement - Generally these business are not carried on. Also they are a heavy burden. Unless the business is a complete success, the owner spends almost all their time invested into making their business a success.
A sole proprietorship is the simplest business form. It is not a legal entity. In simple terms, it is where one person owns a business and is responsible for everything. For example if in a neighborhood you see a sign that says, "Bob's Barber Shop," there is a good chance this is a sole proprietorship assuming the owner is Bob.
Sole proprietorships are very common because they are so simple. They are easy to set up and have nominal costs compared to a corporation. The sets to starting a sole proprietorship are easy. The owner needs to register the name of the shop, secure a local licenses, and then they can be open and ready for business. If the business fails and has financial trouble, creditors can pursue a lawsuit against the owner. If the creditors win, the owner is responsible for paying the money out of pocket.
A sole proprietorship usually has the owner sign a contract in his/her name, because the sole proprietorship does not have a separate identity under the law. The sole proprietorship can have customers write check in the owner's name. For example, for "Bob's Barber Shop" customers may write checks to Bob Baker. Sole proprietorships can avoid formalities such as voting with partners on certain decisions. Several businesses start as a sole proprietor and move up into a more complex business.
Examples:
1. Local Restaurants
2. Hair Salons
3. Photography Studios
4. Freelance Writers
Examples in Indiana:
1. Flutter By Photography - maryjogreathouse.com
2. Snips - snips.in.com
3. Lazy Daze - lazydazecoffeehouse.com
Advantages of a Sole Proprietorship
1. Easy to form and dissolve - Sole proprietorships are simple to form and are the least expensive compared to other business types. The costs are minimal and the legal costs are limited to the license or permits.
2. All decisions are left up to the owner of the sole proprietor - The owner has complete control. Their are no power struggles and decisions are easily made since their is only one person involved. Their are no consultations required within a sole proprietorship.
3. Profit is only taxed once - The business is not taxed separately. This makes the tax requirements easy to fulfill and the tax rates are lower than other types of business firms.
Disadvantages of a Sole Proprietorship
1. Face unlimited liability - There is no legal separation between the business and the owner. The owner can be help personally responsible for the debts of the business or the actions done by employees.
2. Limited ability to raise funds - Raising money for a sole proprietor can be difficult. There is no stock available to be sold or bought and investors rarely invest. Additionally, banks are hesitant to give a sole proprietor a loan because the repayment is not very credible.
3. Ends with death or retirement - Generally these business are not carried on. Also they are a heavy burden. Unless the business is a complete success, the owner spends almost all their time invested into making their business a success.
Prompting Question: Can you name one sole proprietor in your area?
[email protected] Social Studies Date created: May 2, 2013 Updated: May 18, 2013