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Proprietorship Definition Example Essay

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

Disadvantages of a Sole Proprietorship

  • The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors won't usually invest in sole proprietorships.

Note: If the business is conducted under a fictitious name, it's up to the sole proprietor to file all applicable forms under the fictitious name or under doing business as (DBA). This, however, does not mean that the business is a separate entity from a legal standpoint. The sole proprietor remains liable even if he or she is doing business under a fictitious name.

Most sole proprietors rely on loans and personal assets to initially finance their business. Some will elect to incorporate once the business has started to grow, while other business owners maintain their sole proprietorship for many years.

Checklist: The Makings of a Sole Proprietorship

By AllBusiness.com

  • Ownership rules: A sole proprietorship has one business owner.
  • Personal liability of owner: Proprietor has unlimited personal liability for the obligations of the business.
  • Tax treatment: Business entity is not taxed, as the profits and losses are passed through to the sole proprietor.
  • Key documents needed for formation: DBA filing, business license
  • Management of the business: Sole proprietor manages the business.
  • Capital contributions: Sole proprietor contributes whatever capital needed.

Copyright 2007 AllBusiness.com Inc. All Rights Reserved.

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Business Types: Sole Proprietorship Essay

1526 Words7 Pages

Sole Proprietorship
Is the most common business type, where the business is operated and owned by a single individual. In this type of business, the sole proprietor provides capital, does not share profit or loss and runs the business alone. As such, the business and the owner are indistinguishable for tax and legal purposes (Dlabay, 2011). To differentiate this business from other business types, a sole proprietorship is discussed under the following characteristics.
i. Liability: Incase of business debts, the owner is liable personally-unlimited liability. The assets of the business owner can be taken to pay off business debts since the two are not distinct (Dlabay, 2011). This is the major limitation of a sole proprietorship.
ii.…show more content…

Sole Proprietorship
Is the most common business type, where the business is operated and owned by a single individual. In this type of business, the sole proprietor provides capital, does not share profit or loss and runs the business alone. As such, the business and the owner are indistinguishable for tax and legal purposes (Dlabay, 2011). To differentiate this business from other business types, a sole proprietorship is discussed under the following characteristics.
i. Liability: Incase of business debts, the owner is liable personally-unlimited liability. The assets of the business owner can be taken to pay off business debts since the two are not distinct (Dlabay, 2011). This is the major limitation of a sole proprietorship. ii. Income Taxes: Since the business owner and the business are indistinguishable, the proprietor is taxed at personal tax rate. It is significant to note that some expenses can be deducted before arriving at taxable income (Dlabay, 2011). iii. Longevity: In case of incapacity or death of the owner, the venture dies. The assets of the business are passed to personal representatives or trustees, who administer the estate and settle any obligations of the business. This is a disadvantage of sole proprietorship in that there is no continuity (Dlabay, 2011). iv. Control: A sole proprietor runs and makes decisions autonomously. This is an advantage in that making decisions is easy as no consultations are required (Dlabay, 2011).
v. Profit

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