Sole Proprietorship

Characteristics

• The sole proprietorship has only one owner.
• It is managed either by the owner or by a manager appointed and remunerated by that owner.
• There are little or no legislative acts governing formation.
• It needs only a trading licence, with no other legal formalities.
• The owner's liability for the debts of the business is unlimited. (The owner's personal assets may be sold to pay off the debts of the business.)
• The owner may choose any name for the business. (There is no legal prescription, so there can be numerous businesses with the same name.)
• There are few restrictions on the name that the partnership may take.
• It has no legal personality.
• The owner contributes all capital, but he/she may borrow.
• The owner may sell the enterprise whenever he/she wants, to anyone.
• The owner takes all profits.
• The business has no continuity: if the owner dies, for example, the enterprise will dissolve.
• Auditing financial statements is unnecessary.
• It is also unnecessary, therefore, to compile a balance sheet (although this may be required by a loan-granting bank).
• The owner is the legal entity; he, therefore, is responsible for income tax in his personal capacity.

Advantages

• The sole proprietorship is easily established, there being no legal formalities.
• Owner takes all profits.
• There are no overhead expenses required in the establishment.
• It allows for quick and free decision-making.
• The owner may gain experience of all aspects of the business world.
• If the owner puts all of his/her abilities into the enterprise, all of them may be utilised to his/her benefit.
• Ownership easily transferred.
• Close ties can develop between the owner and his/her customers and employees, and this generally leads to faithfulness.
• A large number of sole traders in one area leads to good competition, which will benefit both owners and consumers.
• Such a business can adapt comparatively easily to changing conditions.

Disadvantages

• The owner has unlimited liability because his/her personal assets may be sold in order to pay for the debts of the business.
• There is no continuity.
• Because there are a limited number of assets to give as security, it is difficult to obtain a loan.
• It is not easy to acquire good, qualified staff, as there is little to offer them in the way of promotion.
• Salaries paid to workers are normally lower than the salaries that bigger companies can offer.
• The owner is usually responsible for all managerial functions, often without the necessary expertise and experience.
• Competition is usually strong.
• Prices offered to consumers by sole traders are usually far higher than those of the other forms of ownership, and consumers generally buy where it is cheapest to do so.
• There is usually a limited amount of capital with which to expand the business.
• The owner is the only person with direct interest in the business. His/her decisions depend solely on his/her judgement. Wrong decisions are often made.
• If the owner is not wholly dedicated to business, he/she will suffer the effects directly.

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Author's Bio: 

This definition is part of a series that covers the topic of Business Opportunities. The Official Guide to Business Opportunities is Richard Loewenhagen. He is an authority on small business and home based business development. He also is the CEO of threes companies: One specialized in Senior Assisted Living, another brick and and mortar Martial Arts School, and a highly successful home based business. As a retired field grade military officer, he possesses a Masters Degree in Operational Research, is a Graduate of both the Air Command and Marine Corps Command and Staff Colleges, and is certified as a systems scientist (CPL) by the International Society of Logistics Engineers.

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