Sole Proprietorship

AuthorG. Maxwell
Pages679-682

Page 679

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

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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.

The Internal Revenue Service (IRS) permits one exception to the "one sole owner" rule. If the spouse of a married sole proprietor works for the firm but is not classified as either a partner or an independent contractor, the business may still considered to be a sole proprietorship and forgo having to submit a partnership income tax return. Also, the sole proprietorship can avoid self-employment taxes.

If the owner's true name is used, such as "John Smith Auto Repair," there is ordinarily no problem in selecting a name for the sole proprietorship. However, care must be taken if a fictitious name is contemplated. The owner must register the name with the county to see whether the name duplicates that of another business. Even if it does not, the owner must submit a "doing business as (DBA)" form to the county, or, in a few states, to the secretary of state.

ADVANTAGES

An owner of a sole proprietorship gets to keep all profits derived from the operation. 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. Even if these employees or independent consultants are requested to offer their opinions relating to the firm's business decisions, the opinions are considered to be only recommendations. The owner cannot abdicate any responsibility for the outcomes fostered by these recommendations.

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 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...

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