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Chapter4 SoleProprietorship
Therearethreevery commonforms of business ownerships.The first is soleproprietorship. The secondis partnership. The third is the corporation. There are more sole proprietorships in this countrythanany otherform ofbusiness ownership.Theydo not, however,accountfor mostbusiness receiptsandnetprofits. In ttrischapteryou will learn aboutsoleproprielorships.Their advantages anddisadvantages will be discussed too. SoleProprietorshipsand Their Advantages SoleProprietorships. A soleproprietorship is definedas a business ownedby a single personwho receivesall profis and assumes all risks. Thereare certainfacts aboutsole proprietorshipswhich you should know. Owners of this form of businessarc 'selfemployed";usuallytheowners This form of business aretheactivemanagers. is theoldesr form of business organization.It is alsothe easiest to start,operaE,md type of business end. This may be the reason why it is the mostcommonform of organization. In Frgure 4-1 you seea comparison of thethreemostcommonformsof businesses. Figure4-1. Comparisonof Three tr'ormsof Business

Number of Flrms

Buslness Recelpts (Soles)

$lsote

ProprletorsNpsf]

Coporotions @

Portnerships

I 05thedition From: StatlstlcalAbstract of the United States'1985, (U. S. Deparrnentof Commerce, Bureau of the Census,U. S. D,C.),pg. 5f 6. Govemment PrintingOffice,Washington,

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You seethat thereare more soleproprietonhipsthanpartnerships or corporations.AIso depictedin Figure4- I is thatpercentage of salesfor soleproprietorships is far lower than that for corporations. Advantages.Soleproprietorships havecertainadvantages. A soleproprietorshipis easy andinexpensive to setup. Thereare major reasons why this is so. Fint, no statecharter isneeded. Second,nolegalagreementorfeeisrequired" Ifastateorcitytcenseisrequired, it is easyto attain. Theonly otherlegalrequirement is thattheactivity itself mustbe legal. Consideran exampleof a soleproprietorshipsimply setup. Mr. Jonesrenteda standto produce.At thispoint, he wasin business sell some asa soleproprietor. Anotheradvantage of soleproprietorship is thatit allowstheownermuchfreedom.The ownercanmakebusinessdecisionswithoutconsultingaparfirerorboardofdirectors. He/ promptly. Theownercanalsochange shecantakeactionon decisions methods of doing quickly. business A third advantage of ilre soleproprietorship is that it encourages theownerto do well. All profits go to theproprielor. This motivates him/herto work hardand!o usegoodjudgment. How Certain Disadvantages Affect SoleProprietorships Inability to raise large sumsof capital. often, the sole owner is unableto raiseenough capital, hindering hiffier from starting or expanding thebusiness, capital is theamount of moneythattheproprietorhasandcanborrow to investin thebusiness. Therearecertain reasons why theproprietor proprietorship of a sole hasdifficulty raisingcapital. Banks oftenlendnomorethanthevalueoftheproprietor'spersonalassets. second,aproprietor's creditratingis usuallylower ttranthatof a largefirm, so a higherinterest rateon money bonowedmustbepaid. Third,theproprietorcannotatEactinvestorsbysharingownership of the business.Finally, once in operation, profits aloneare often too low to afford expansion.Changingto someotherform of business ownenhip may be requiredfor expansion. Limitedlife. A soleproprietorship is legallyendedupondeattr,bankruptcy,imprisonment, or insanity of theowner.It is oftensomucha one-person business thatit is profitable only aslongastheowneris active. Dueto its uncertain limitedlife, otherbusinesses areoften unwilling to makelong-term financialcommitments with theowner. anfimitedliabilityfor debts.Unlimiledliabilirymeans maytaketheowner's thecreditors personal possessions ifdebts arenot paidby thebusiness. fails,theowner If thebusiness possessions. may losemostof hMer personal savings and

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Lack of assistancein managemenL The owner must often perform all functions of management in the business.He/shemay serveas generalmanager, salesmanager, purchasing manager, advertising manager, accountant, and personnel manager.Many people arenotqualified to fulfill all management functions, socertain areas of thebusiness suffer. operationalproblems. problemsin operating canhinderthe progress madeby a sole proprietorship.certain operational problemsdo arise.First, poorlocationandinadequate buildingsandequipmentmayhinderprogress. Second,rheneedtopayhighenoughwages goodemployees to attract maynotbemet. Third,purchasing a largevolumeto getthebest discount may be impossible. Summary Averycommonformofbusinessownershipisthesoleproprietorship. Therearemoresole proprietorships in our country thanany other form of business organization. Thereare several advantages of thesoleproprietorship. It is easy to setup. It allowstheownermuch freedom.In addition, it encourages theownerto do well. Thereareseveral disadvantages of soleproprieorships too. It is difficult for the soleowner to raise money to start and expand his/herbusiness. A soleproprietorship is legallyended if something happens to theowner.Theownerriskslosinghis/her personal possessions if it fails. Theownermust fultill all functions of management. Uniqueoperational problems mayaffectits success. KEYTERMS capital unlimitedliabiliry soleproprietorship AND EXERCISES QUESTTONS l. 2. 3. 4. 5. Why aremostsmallbusinesses soleproprietorships? Describe threedisadvantages of a soleproprietorship. What is capital? What doesunlimitBd liabiliry mean? How manysoleproprietorships arein theareain which you live?

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