A sole proprietor is someone who owns an
unincorporated business by himself or
herself. However, if you are the sole member
of a domestic limited liability company
(LLC), you are not a sole proprietor if you
elect to treat the LLC as a corporation.
The sole proprietor
owns all the assets and is;
Responsible for
all debts
Entitled to the
profits
Accountable for
any losses
A sole proprietorship
essentially means a person does
business in his or her 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.
A sole proprietorship is the
simplest form of business ownership.
Not surprisingly, the vast majority
of small businesses begin their
existence as sole proprietorships. A
sole proprietorship has but one
owner. That sole owner may engage in
any form of legal business activity
any time and anywhere. Other than
the various local and state business
licenses that every business must
purchase regardless of type of
ownership, no legal formalities are
required to start or operate the
business. The owner is responsible
for securing and investing the funds
for the business. These funds may
come from the owner's existing or
borrowed financial resources.
Advantages
An owner of a sole
proprietorship gets to keep all
profits derived from the operation
but must also bear all losses. The
owner may even share any portion of
the profits and losses with another
person or persons.
The owner has the authority to
make all the decisions relating to
the business. Since there are no
co-owners, there is no need to hold
policy-meeting sessions or form any
group similar to a board of
directors. The owner, of course,
must bear the responsibilities that
accrue from the decisions made.
The owner may hire employees or
work with independent consultants
and still retain the sole
proprietorship form of ownership.
Disadvantages
Unlimited liability is the major
disadvantage borne by the sole
proprietorship. The owner is
financially responsible for
satisfying all business debts and/or
losses suffered by the firm, even to
the point of sacrificing his or her
personal or other business interests
to pay off any liabilities. For
example, assume a lawsuit inflicts a
debt of $190,000 on a sole
proprietorship that is able to
contribute only $85,000 toward
settlement of the liability. Further
assume that the proprietor owns a
home, equipment, and other business
investments totalling $365,000.
Owners of sole proprietorships
have severe potential liabilities
from customers, competitors,
lenders, employees, and even
government. The cost of liability
insurance or of defending against a
lawsuit is beyond the financial
capability of many business firms.
For this reason, most individuals
holding somewhat extensive personal
assets do not ordinarily use the
sole proprietorship form of
ownership. Instead, an alternative
form of ownership is often used,
such as corporation or special forms
of partnership, that eliminates the
unlimited liability.
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