SOLE PROPRIETORSHIP Paper 2/7

SOLE PROPRIETORSHIP

The most common and simplest form of business is a sole proprietorship. Many small businesses operating in the United States are sole proprietorships. An individual proprietor owns and manages the business and is responsible for all business transactions. The owner is also personally responsible for all debts and liabilities incurred by the business. A sole proprietor can own the business for any duration of time and sell it when he or she sees fit. As owner, a sole proprietor can even pass a business down to his or her heirs.

In this type of business, there are no specific business taxes paid by the company. The owner pays taxes on income from the business as part of his or her personal income tax payments.

Sole proprietors need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances. The paperwork and formalities, however, are substantially less than those of corporations, allowing sole proprietors to open a business quickly and with relative ease - from a bureaucratic standpoint. It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors.

Advantages of a Sole Proprietorship

• A sole proprietor has complete control and decision-making power over the business.

• Sale or transfer can take place at the discretion of the sole proprietor.

• No corporate tax payments 

• Minimal legal costs to forming a sole proprietorship 

• Few formal business requirements 

·           Ease of formation: Starting a sole proprietorship is much less complicated than starting a formal corporation, and also much cheaper.

·           Tax benefits: The owner of a sole proprietorship is not required to file a separate business tax report.

·           Employment: Sole proprietorships can hire employees.

·           Decision making: Control over all business decisions remains in the hands of the owner. The owner can also fully transfer the sole proprietorship at any time as they deem necessary.

Disadvantages of a Sole Proprietorship

Forming a sole proprietorship does involve some risks, mainly to the owner of the business, as legally speaking they are not treated separately from the business. Some disadvantages of sole proprietorships are:

  Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business

  Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. 

  Lack of “continuity”: The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. 

  Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can be difficult to generate capital.