Business Structures: Sole Proprietorship
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The sole proprietorship is the least complex form of business structure, with all assets owned by a single individual and all liabilities accruing to the owner. The sole proprietorship is not a separate legal entity under the law, and is considered the activity of the individual that owns the business. This type of business structure is best suited for a small business operation that is not capital intensive and faces minimal liability issues that can be covered through the use of insurance or propriety vs. security. Examples of activities that are suited for sole proprietorships are home retail and service businesses and relatively small retail outlets that do not sell goods or services that can lead to high liability in the event that they cause damages to the customer.
The primary advantage of the sole proprietorship is the simplicity of organization and operation, which places all decision-making capability under the control of a single individual. There are minimal initial organizational costs, which often involve only the registration of a business name, obtaining a sales tax permit and in some locations a business permit. Tax issues and preparation are relatively simple, with profits and losses accruing to proprietors as part of their personal income. This business structure allows the sole proprietor to engage employees and operate in all respects as a complex business entity.
Disadvantage of the Sole Proprietorship
The primary disadvantage of the sole proprietorship, however, lies in liability. The owner is solely and fully responsible for all debts of the organization, which can include the owner’s personal assets in the event that the business cannot satisfy its obligations to creditors. This means that it is possible for the owner to face personal bankruptcy if the business falls into significant debt. As a result, a single individual considering using the sole proprietorship for a business structure in a start-up should carefully consider the potential liability issues involved with the type of business activity before settling on this type of structure.