$udySkilb lor Business 347

Chapter4 SoleProprietorship

Thereare three very commonforms of businessownerships. The first is soleproprietor- ship. The secondis partnership. The third is the corporation. There are more sole proprietorshipsin this countrythan any otherform ofbusinessownership. They do not, however,account for mostbusiness receipts and net profits. In ttris chapteryou will learn about sole proprielorships. Their advantagesand disadvantageswill be discussedtoo.

SoleProprietorships and Their Advantages

SoleProprietorships. A soleproprietorship is definedas a businessowned by a single personwho receivesall profis and assumesall risks. There are certain facts aboutsole proprietorshipswhich you should know. Owners of this form of businessarc 'self- employed";usually the ownersare the active managers. This form of businessis theoldesr form of businessorganization. It is alsothe easiesttype of businessto start,operaE, md end. This may be the reasonwhy it is the most commonform of organization. In Frgure 4-1 you seea comparisonof thethree most common forms of businesses.

Figure4-1. Comparisonof Three tr'ormsof Business

Numberof Flrms BuslnessRecelpts (Soles)

$lsote ProprletorsNpsf] Coporotions @ Portnerships

From: StatlstlcalAbstract of the United States'1985, I 05thedition (U. S. Deparrnentof Commerce,Bureau of the Census,U. S. GovemmentPrinting Office, Washington, D,C.), pg. 5f 6. 348 SampleChapters

You seethat thereare more soleproprietonhips than partnershipsor corporations. AIso depictedin Figure 4- I is that percentageof salesfor soleproprietorships is far lower than that for corporations.

Advantages. Soleproprietorships have certain advantages. A soleproprietorship is easy and inexpensiveto set up. Thereare major reasonswhy this is so. Fint, no statecharter isneeded.Second,nolegalagreementorfeeisrequired" Ifastateorcitytcenseisrequired, it is easyto attain. The only otherlegal requirement is that theactivity itself mustbe legal. Consideran exampleof a soleproprietorship simply setup. Mr. Jonesrented a standto sell someproduce. At thispoint, he wasin businessas a soleproprietor.

Anotheradvantage of soleproprietorship is thatit allowsthe owner much freedom. The ownercanmakebusinessdecisionswithoutconsultingaparfirerorboardofdirectors.He/ shecan take action on decisionspromptly. Theowner can also change methods of doing businessquickly.

A third advantageof ilre soleproprietorship is that it encouragesthe ownerto do well. All profits go to theproprielor. This motivateshim/her to work hardand !o usegood judgment.

How Certain DisadvantagesAffect SoleProprietorships

Inability to raise large sums of capital. often, the sole owner is unableto raiseenough capital,hindering hiffier from startingor expandingthe business, capital is theamount of moneythat theproprietor has and can borrow to investin thebusiness. There are certain reasonswhy theproprietor of a soleproprietorship has difficulty raisingcapital. Banks oftenlendnomorethanthevalueoftheproprietor'spersonalassets.second,aproprietor's creditrating is usuallylower ttranthat of a largefirm, so a higherinterest rate on money bonowedmustbepaid.Third,theproprietorcannotatEactinvestorsbysharingownership of the business.Finally, once in operation,profits aloneare often too low to afford expansion.Changing to someother form of businessownenhip may be requiredfor expansion.

Limitedlife. A soleproprietorshipis legallyendedupondeattr,bankruptcy,imprisonment, or insanityof theowner. It is oftenso much a one-personbusiness that it is profitableonly aslong as the owner is active. Dueto its uncertainlimited life, otherbusinesses are often unwilling to makelong-term financial commitments with theowner.

anfimitedliabilityfor debts.Unlimiled liabiliry means the creditors may take the owner's personalpossessions ifdebts arenot paidby thebusiness. If thebusiness fails, the owner may losemost of hMer personalsavings and possessions. StudySkills for Business 349 Lack of assistance in managemenL The owner must often perform all functions of management in the business.He/she may serveas generalmanager, sales manager, purchasing manager,advertising manager, accountant, and personnelmanager. Many people arenotqualified to fulfill all managementfunctions, so certain areas of thebusiness suffer.

operationalproblems. problems in operatingcan hinder the progressmade by a sole proprietorship. certain operationalproblems do arise. First, poor locationand inadequate buildingsandequipmentmayhinderprogress.Second,rheneedtopayhighenoughwages to attractgood employeesmay not be met. Third,purchasing a largevolume to getthe best discountmay be impossible.

Summary

Averycommonformofbusinessownershipisthesoleproprietorship.Therearemoresole proprietorshipsin our country than any other form of businessorganization. There are severaladvantages of thesole proprietorship. It is easyto setup. It allowsthe owner much freedom. In addition,it encouragesthe owner to do well. Thereare several disadvantages of soleproprieorships too. It is difficult for the sole owner to raise money to start and expandhis/her business.A soleproprietorship is legallyended if somethinghappens to theowner. Theowner risks losing his/her personal possessions if it fails. Theowner must fultill all functions of management.Unique operational problems may affect its success.

KEYTERMS

capital unlimitedliabiliry sole proprietorship

QUESTTONSAND EXERCISES l. Why aremost small businesses sole proprietorships? 2. Describethree disadvantages of a soleproprietorship. 3. What is capital? 4. What doesunlimitBd liabiliry mean? 5. How manysole proprietorships are in thearea in which you live?