The Advantages and Disadvantages of the Sole Proprietorship

The Sole Proprietorship
The three major forms of private business ownership are the sole proprietorship, the partnership, and the corporation. The sole proprietorship is the oldest and most common form of private ownership. A sole proprietorship is a business owned by one person.

Advantages of the Sole Proprietorship
The sole proprietorship has several advantages: It is simple to start, the proprietor owns all the profits, there is much personal satisfaction, the proprietor is the sole decision maker, there is no tax on the business as distinct from the owner, and it is easy to dissolve.

  • Simple to start. There are no laws on setting up a sole proprietorship. Of course, the business must be legal, and local and state laws require licenses and permits. Usually the sole proprietor must register the firm’s name at the county courthouse. This way two firms cannot operate under the same name.
  • Proprietor owns all profits. As a sole owner, the proprietor owns the firm and its profits (or losses) outright.
  • Personal satisfaction. Sole proprietors can enjoy the freedom of being their own boss they work for themselves. They also can get a lot of satisfaction out of watching their firms grow because they are very much involved in their firms.
  • Sole decision maker. Sole proprietors decide for themselves what hours to work and whether to expand their firms. They don’t have to reveal their business plans to outsiders. Nor do they have to disclose financial data to anyone except tax collectors.
  • No tax on business as distinct from owner. The sole proprietor is the firm, so the owner pays only personal income taxes on its profits. There is no income tax on the firm as a separate entity.
  • Easy to dissolve. A sole proprietor who wants to go out of business simply sells the business property. No permission is needed to dissolve the business.

Disadvantages of the Sole Proprietorship
Sole proprietorships have four disadvantages: The owners have unlimited financial liability, they find it hard to raise funds for expansion, they often have no one to share the management burden with, and their businesses are impermanent.

  • Unlimited financial liability. Unlimited liability is the concept that the business owner is responsible for claims against the firm that go beyond the value of the owner’s ownership in the firm. Liability could extend to the owner’s personal property (furniture, car, and personal savings) and, in some states, the owner’s real property (home and other real estate). If a sole proprietor goes out of business, sells the business property, and still owes creditors, they can legally lay claim to the proprietor’s nonbusiness property. Sole proprietors risk losing everything they own.
  • Hard to raise funds for expansion. The amount of money a sole proprietor can invest in the firm is limited to what the person has and can borrow. Often it is hard to raise more money. The Sharpen Your Skills feature focuses on the importance of a firm’s business plan in helping the firm to raise money.
  • Often have no one to share management burden. A sole proprietorship’s success often depends on one person’s talents and skills. As the firm grows, the owner may be spread too thin. Making one’s own management decisions might no longer be an advantage.
  • Impermanence. If the owner were to die, go to prison, or go insane, the business would legally end. It could be passed on to a daughter or son, but then a new proprietorship would be formed. A sole proprietorship is not permanent.

 

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