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Section 27.1. Sole Proprietorship and Partnership. Chapter. 27. Section 27.1 Sole Proprietorship Section 27.2 The Partnership . What You’ll Learn. How to define sole proprietorship (p. 584) How to create a sole proprietorship (p. 584). What You’ll Learn.
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Sole Proprietorship and Partnership Chapter 27 Section 27.1 Sole Proprietorship Section 27.2 The Partnership
What You’ll Learn • How to define sole proprietorship (p. 584) • How to create a sole proprietorship (p. 584)
What You’ll Learn • How to identify the advantages of a sole proprietorship (p. 585) • How to identify the disadvantages of a sole proprietorship (p. 587)
Why It’s Important Understanding the nature of a sole proprietorship will help you decide when to form that type of business association rather than the other associations that are available in the market today.
Legal Terms • sole proprietorship (p. 584) • fictitious name (p. 584) • employer identification number (p. 585) • unlimited liability (p. 587)
Section Outline Creation and Operation of a Sole Proprietorship Advantages of a Sole Proprietorship Disadvantages of a Sole Proprietorship
Pre-Learning Question What is a sole proprietorship?
Creation and Operation of a Sole Proprietorship A sole proprietorship is a form of business that is owned and operated by one person. However, that owner may have any number of agents or employees.
Creation and Operation of a Sole Proprietorship A sole proprietorship is the most common type of business and the easiest to form. Examples include: • Repair shops • Small retail stores • Service organizations
Creation and Operation of a Sole Proprietorship A person who goes into business as a sole proprietor can choose to operate under his or her own name or can make up a name.
Creation and Operation of a Sole Proprietorship If a sole proprietor uses anything but his or her own name, the law calls the made-up name a fictitious name.
Creation and Operation of a Sole Proprietorship In selecting a fictitious name, sole proprietors must not choose a company name already in use.
Creation and Operation of a Sole Proprietorship There usually are few formal requirements in establishing a sole proprietorship.
Creation and Operation of a Sole Proprietorship Some may be required to have • Licenses to legally operate as businesses • Occupational licenses • Certain types of liability insurance
Creation and Operation of a Sole Proprietorship Some states require a formal filing when a sole proprietorship begins or if the sole proprietorship chooses to use a fictitious name.
Advantages of a Sole Proprietorship • Ease of creation • Total control • Retention of profits • Freedom from excessive governmental control • One-time taxation of profits
Ease of Creation A sole proprietorship is the easiest form of business association to form. To create a sole proprietorship, a person needs only to begin the operation of the business.
Ease of Creation When a sole proprietor decides to hire workers, he or she will have to contact the Internal Revenue Service to obtain an employer identification number, which is assigned for income tax purposes.
Total Control In a sole proprietorship, while the sole proprietor is free to seek the advice of experts, such as accountants, attorneys, and financial planners, all decisions are up to the sole proprietor.
Retention of Profits Sole proprietors get to keep all of the profits that the firm makes. They must, of course, pay taxes on those profits.
Freedom from Excessive Governmental Control The regulations a sole proprietor must follow are much less cumbersome than the regulations required of other types of business ownership, such as limited partners and corporations.
One-Time Taxation of Profits Sole proprietorships do not pay taxes as a business. Rather, the individual sole proprietor who owns the business pays taxes based upon his or her income, which includes any profits made by the business.
Disadvantages of a Sole Proprietorship • Limited capital • Unlimited liability • Limited human resources • Limited lifetime
Limited Capital All money used to finance the business must come from the proprietor’s savings or income, or from loans obtained by the proprietor.
Unlimited Liability Unlimited liability means that the business owner is responsible for all losses experienced by the business.
Limited Human Resources As the only person responsible for the decisions that affect the business, a sole proprietor is subject to tremendous stress. Even if he or she consults experts, the decision-making responsibility still falls upon the owner.
Limited Lifetime Unlike a corporation, which has perpetual existence, a sole proprietorship lasts only as long as the proprietor. When the proprietor dies or sells or closes the business, the company no longer exists.
Amira wants to start her own business. She really doesn’t like the idea of working for someone else—she wants work to suit her own schedule and she has very definite ideas about how a business should be run.
Her idea is to open a slushee and fruit juice stand near the city park. However, she estimates the stand will cost about $7,500 to open and she has only saved $4,000.
Given Amira’s circumstances, name one advantage Amira would find to having a sole proprietorship. Name one disadvantage.
ANSWER Advantage—total control; disadvantage—limited capital.
Section 27.1Assessment Reviewing What You Learned • What is a sole proprietorship?
Section 27.1Assessment Reviewing What You Learned Answer A form of business that is owned and operated by one person.
Section 27.1Assessment Reviewing What You Learned • How does a sole proprietorship begin?
Section 27.1Assessment Reviewing What You Learned Answer To create a sole proprietorship, a person needs only to begin the operation of the business.
Section 27.1Assessment Reviewing What You Learned • What are the advantages of a sole proprietorship?
Section 27.1Assessment Reviewing What You Learned Answer Ease of creation, total control, retention of profits, freedom from excessive governmental control, and one-time taxation of profits.
Section 27.1Assessment Reviewing What You Learned • What are the disadvantages of a sole proprietorship?
Section 27.1Assessment Reviewing What You Learned Answer Limited capital, unlimited liability, limited human resources, and limited lifetime.
Section 27.1Assessment Critical Thinking Activity Licensing Requirements Why does the government interfere in the formation and regulation of some sole proprietorships by creating licensing requirements?
Section 27.1Assessment Critical Thinking Activity Answer Licensing Requirements Answers will vary but could recognize that licensing requirements may be necessary for public safety.
Section 27.1Assessment Legal Skills in Action The Responsibilities of a Sole Proprietor Your Aunt Matilda, a sole proprietor, owns a store called Scrapbook Heaven. She has decided to hire you and your friend Ted to work in the store on the weekends.
Section 27.1Assessment Legal Skills in Action The Responsibilities of a Sole Proprietor Aunt Matilda is convinced that hiring you and Ted will not involve any new entanglement with the government.
Section 27.1Assessment Legal Skills in Action The Responsibilities of a Sole Proprietor Send Aunt Matilda an e-mail message that explains the responsibilities of a sole proprietor who hires additional workers.
Section 27.1Assessment Legal Skills in Action Answer The Responsibilities of a Sole Proprietor E-mails will vary, but should include that once Aunt Matilda hires you and Ted, she will have to contact the Internal Revenue Service to obtain employer identification numbers.
