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Business LibreTexts

6.2: Sole Proprietorship

  • Page ID
    11437
  • Learning Objective

    1. Describe the sole proprietorship form of organization, and specify its advantages and disadvantages.

    A sole proprietorship is a business owned by only one person. The most common form of ownership, it accounts for about 72 percent of all U.S. businesses. It’s the easiest and cheapest type of business to form: if you’re using your own name as the name of your business, you just need a license to get started, and once you’re in business, you’re subject to few government regulations.

    Advantages and Disadvantages of Sole Proprietorships

    Factors

    Consideration

    Start-up

    Easy and cheap to form

    Control

    Owner has complete control over business

    Benefactors

    Owner receives all income earned by the business

    Taxation

    Profits earned are taxed as personal income (no any special federal and state income taxes are incurred)

    Capability

    Owner must supply all talents necessary to make the business a success.

    Sustainability

    If the owner dies, the business dissolves

    Financing

    All money borrowed by the business is loaned personally to the owner

    Liability

    Unlimited personal liability for losses incurred by the business or for any legal action

    The sole proprietor bears unlimited liability for any losses incurred by the business. The principle of unlimited personal liability means that if the company incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable. As a sole proprietor, the owner puts his or her personal assets (bank account, car, maybe even home) at risk for the sake of the business. The owner can lessen the risk with insurance, yet the liability exposure can still be substantial.

    Key Takeaways

    • A sole proprietorship is a business owned by only one person.
    • It’s the most common form of ownership and accounts for about 72 percent of all U.S. businesses.
    • Advantages of a sole proprietorship include the following:
      1. Easy and inexpensive to form; few government regulations
      2. Complete control over your business
      3. Get all the profits earned by the business
      4. Don’t have to pay any special income taxes
    • Disadvantages of a sole proprietorship include the following:
      1. Have to supply all the different talents needed to make the business a success
      2. If you die, the business dissolves
      3. Have to rely on your own resources for financing
      4. If the company incurs a debt or suffers a catastrophe, you are personally liable (you have unlimited liability)