Sole proprietorship advantages and disadvantages pdf

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sole proprietorship advantages and disadvantages pdf

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The most common form of ownership, it accounts for about 72 percent of all U. As sole owner, you have complete control over your business.

A sole proprietor business is established, owned, financed and controlled by a single person who is known as sole trader or sole proprietor. Such a business run by sole trader or sole proprietor is known as sole trade or sole proprietorship. Easy to Form 2. Effort-Reward Relationship 3.

Advantages and Disadvantages of Sole Proprietorship

The most common form of ownership, it accounts for about 72 percent of all U. As sole owner, you have complete control over your business. In exchange for assuming all this responsibility, you get all the income earned by the business.

For many people, however, the sole proprietorship is not suitable. The flip side of enjoying complete control, for example, is having to supply all the different talents that may be necessary to make the business a success. And if you die, the business dissolves.

Even more important, the sole proprietor bears unlimited liability for any losses incurred by the business. As you can see from Figure 1, 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, you put your personal assets your bank account, your car, maybe even your home at risk for the sake of your business.

You can lessen your risk with insurance, yet your liability exposure can still be substantial. Given that Ben and Jerry decided to start their ice cream business together and therefore the business was not owned by only one person , they could not set their company up as a sole proprietorship. Figure 1. Sole Proprietorship and Unlimited Liability. About 10 percent of U. The cost varies according to size and complexity. Professionals can help you identify and resolve issues that may later create disputes among partners.

The agreement might provide such details as the following:. In a partnership, it may work according to the following scenario.

One day, you return from lunch to find your establishment on fire. As you watch your livelihood go up in flames, your partner tells you something else: because he forgot to pay the bill, your fire insurance was canceled.

In other words, any party who suffered a loss because of the fire can go after your personal assets. Figure 2. General Partnership and Unlimited Liability. Many people are understandably reluctant to enter into partnerships because of unlimited liability.

Individuals with substantial assets, for example, have a lot to lose if they get sued for a partnership obligation and when people sue, they tend to start with the richest partner. The partnership has several advantages over the sole proprietorship. First, it brings together a diverse group of talented individuals who share responsibility for running the business.

Second, it makes financing easier: The business can draw on the financial resources of a number of individuals. The partners not only contribute funds to the business but can also use personal resources to secure bank loans. Still, there are some negatives. First, as discussed earlier, partners are subject to unlimited liability. Not surprisingly, partners often have differences of opinion on how to run a business, and disagreements can escalate to the point of actual conflict; in fact, they can even jeopardize the continuance of the business.

Third, in addition to sharing ideas, partners also share profits. While the partnership form of ownership is viewed negatively by some, it was particularly appealing to Ben Cohen and Jerry Greenfield. Starting their ice cream business as a partnership was inexpensive and let them combine their limited financial resources and use their diverse skills and talents.

As friends they trusted each other and welcomed shared decision making and profit sharing. Answer the question s below to see how well you understand the topics covered in this section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

Use this quiz to check your understanding and decide whether to 1 study the previous section further or 2 move on to the next section. Skip to main content. Module: Legal Ownership. Search for:. Advantages and Disadvantages of Sole Proprietorships As sole owner, you have complete control over your business. It brings a diverse group of people together to share managerial responsibilities.

Partners can agree legally to allow the partnership to survive if one or more partners die. It makes financing easier because the partnership can draw on resources from a number of partners. A partnership has several disadvantages over a sole proprietorship: Shared decision making can result in disagreements. Profits must be shared. Each partner is personally liable not only for his or her own actions but also for those of all partners—a principle called unlimited liability.

A limited partnership has a single general partner who runs the business and is responsible for its liabilities, plus any number of limited partners who have limited involvement in the business and whose losses are limited to the amount of their investment. Licenses and Attributions. CC licensed content, Original.

Advantages and Disadvantages of Sole Proprietorships

For details on it including licensing , click here. This book is licensed under a Creative Commons by-nc-sa 3. See the license for more details, but that basically means you can share this book as long as you credit the author but see below , don't make money from it, and do make it available to everyone else under the same terms. This content was accessible as of December 29, , and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages.

10 Advantages and Disadvantages of Sole Proprietorship

Names like Sears, eBay, and JC Penney bring to mind millions of dollars in sales and lasting brand recognition, but they all have something else in common—they started as sole proprietorships. As the most simplistic business structure, sole proprietorships are easy to establish and inexpensive to create. Here, we look at the advantages and disadvantages of sole proprietorships, how they work, and who they best serve. A sole proprietorship is a business structure linking the owner of a business to their company. It is the simplest type of business structure and not a legal entity.

The IRS expects self-employed individuals to pay federal income tax throughout the year, and if you don't pay estimated tax each quarter, Uncle Sam can charge you interest and impose nonpayment penalties. As long as you earn income in a given quarter, you owe tax for that quarter. You must pay federal income tax, along with Social Security and Medicare taxes, known collectively as self-employment tax. The amount of federal income tax you pay is based on your adjusted gross income. The most common and simplest form of business is a sole proprietorship.

A sole proprietorship is the simplest business structure in which one person is the owner and operator of the business. This sole proprietor is responsible for all aspects of the business and reaps all profits of the business. Other common business models include varying partnerships , corporations, limited liability companies LLC , and others. A big difference between sole proprietorships and these other options is that the sole proprietor is solely in charge and responsible.

Proprietorship also called sole trade organisation is the oldest form of business ownership in India.

What are the Advantages of Sole Proprietorship?

Starting a small business can be an intimidating process: You need to come up with a business strategy, solicit customers, and manage short- and long-term finances. Plus, sorting through the paperwork, forms, and registration steps to legally set up your business can be even more frustrating. To explain, other business structures , such as limited liability corporations LLCs , require you to register with your state government before you can do business. With sole proprietorships, on the other hand, you generally do not need to register with the state, instead, you become a business entity merely by virtue of doing business. Nevertheless, one of the initial benefits of sole proprietorship is that this structure allows you to scale up your business much more quickly, and with less government paperwork in the balance. Another one of the biggest advantages of sole proprietorship is the much simpler and straightforward tax requirements, especially compared to other entity types. This being said, however, you also have the option to apply for and use an EIN if you choose there are also certain benefits associated with doing so.

By QuickBooks Canada Team. Most Canadian small business owners choose from the four major types of business structures: sole proprietorship, partnership, cooperative, and corporation. Also known as a sole trader, a sole proprietorship is the least complex business form for one person who owns and runs the company. Whether you want to start a food kiosk, a one-person repair shop, or a freelance writing business, a sole proprietorship is a pretty flexible choice for your corporate form. With less paperwork to file, you only need to keep simple documentation for this business setup. You only need to fill out a simple government form to register a fictitious business name, for example.

Among the different business structures, sole proprietorship is considered and most basic and simplest form. Apart from being a common preference by business owners, it is also owned solely by an individual. Nevertheless, this type of business structure has advantages and disadvantages attributed to it. Here are some of the benefits and drawbacks of a sole proprietorship business type. No Boss One of the reasons entrepreneurs prefer sole proprietorship over other business structures is not having to be accountable to any boss or supervisor since he or she is the owner of the company. This means that the entrepreneur himself is the one at the helm of the business and decisions are made solely by him.

Sole proprietorships have several advantages over other business entities. They are easy to form, and the owners enjoy sole control of the business profits. However, they also have disadvantages, the biggest of which being that the owner is personally liable for all business losses and liabilities.


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