SOLE PROPRIETORSHIP

A 'sole proprietorship', or simply 'proprietorship', is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.
Most sole proprietors will register a trade name or "Doing Business As". This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions.

Contents

Advantages

Disadvantages

References

Advantages

An entrepreneur may opt for the sole proprietorship legal structure because of the advantages it offers to small businesses. There is better control and business administration possible since there is only one owner, who can make decisions quickly without having to consult others. In most cases, there are no legal formalities to forming or dissolving a business. Furthermore, in many jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. In the United States, for example, a sole proprietorship reports its income and deductions using a simple one or two page tax return form. In comparison, an identical small business operating as a corporation or partnership would be required to prepare and submit a tax return several pages in length plus quarterly and annual payroll tax returns. Additionally, all of the profits from the business go right to the owner. A sole proprietorship often has a lot of freedom from government regulations. Every form of business ownership has some sort of government regulation, but in general, the sole proprietorship has the least. There is also the advantage of enjoyment of entire profit. being the sole owner he need not share his profit. Finally, there are more chances for maintaining secrecy. As he is the single person managing the business, he is not expected to share his secrets.

Disadvantages

A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is a ''sine qua non'' of bank financing. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, the proprietor is personally liable. The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.
In countries without a National Health Service, such as United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue.
Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company, or LLC. Note that such an LLC would still be treated as a sole proprietorship for income tax accounting purposes.

References

★ Hamilton, Robert W., and Jonathan R. Macey, ''Cases on Corporations Including Partnerships and Limited Liability Companies'', 9th Ed., West Group, 2005.