Sole Proprietorship
Sole Proprietorship
A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits ( subject to taxation specific to the business ) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor’s. This means that the owner has no less liability than if they were acting as an individual instead of as a business. It is a sole proprietorship in contrast with partnerships.
A sole proprietor may use a trade name or business name other than his or her legal name. In many jurisdictions there are rules to enable the true owner of a business name to be ascertained. In the United States there is generally a requirement to file a doing business as statement with the local authorities. In the United Kingdom the proprietor’s name must be displayed on business stationery, in business emails and at business premises, and there are other requirements.
Advantages
There are many advantages of corporations that are described in that article; chiefly they are the ability to raise capital either publicly or privately, to limit the personal liability of the officers and managers, and to limit risk to investors.
The disadvantages of corporations are advantages to proprietorship: reduced cost of a business, as corporations must do many things like purchasing, accounting, and legal actions in more expensive ways and are subject to special taxes and fees; easier and cheaper to start and discontinue without required fees and legal expenses; and easier management, particularly when a sole owner wishes to have exclusive control, as most corporations are required to be controlled by a board of directors of several persons.
Disadvantages
Raising capital for a proprietorship is more difficult because an unrelated investor has less peace of mind concerning the use and security of his or her investment and the investment is more difficult to formalize; other types of business entities have more documentation.
As a business becomes successful, the risks accompanying the business tend to grow. One of the main disadvantages of sole proprietors is unlimited liability where the owner’s personal assets can be taken away. This is particularly true for wrongdoing or liabilities created by employees; a corporation only partially shields an owner or officer for his own actions according to the principle of piercing the corporate veil. Sole proprietors often do not for significant periods and lack continuity. Also, being alone in business, sole proprietors generally lack money which leads to failure. The small size of the business limits the breadth of management skills because there are fewer people working together. As employees generally seek stable employers, small independent businesses that have a high chance of failing have more difficulty attracting skilled people. Certain business structures such as Limited Liability Company allow shielding of personal assets, and sometimes, favorable tax treatment, but there are disadvantages and limitations also.
Lending
Holding everything else constant, small corporations are less creditworthy than small non corporate firms, because the former have only the corporation’s assets to back up business debt, while the latter have both the firm’s assets and the owner’s personal assets. Lenders also know that owners of small corporations can easily shift assets between their personal accounts and their corporations’ accounts, so that lenders may not view the corporate / non corporate distinction as meaningful for small firms. In making loans to small corporations, lenders therefore may require that owners personally guarantee the loans. This abolishes the legal distinction between corporations and their owners for purposes of the particular loan and puts the owner’s personal assets at risk to repay the loan.
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