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SOLE PROPRIETORSHIP
Sole Proprietorship
A sole proprietorship is a business which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation do not apply. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation, it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporation would have to.
Most sole proprietors will register a trade name or "Doing Business As". This allows the proprietor to do business with a name other than their legal name and also allows them to open a business account with banking institutions.
Advantages Of sole proprietorships
An entrepreneur may opt for the sole proprietorship legal structure because of the advantages it offers to small businesses. There is better control and business administration possible since there is only one owner, who can make decisions quickly without having to consult others. In most cases, there are no legal formalities to forming or dissolving a business.
Disadvantages Of sole proprietorships
A business organized as a sole proprietorship will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, it is the proprietor's problem.
Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company.
Reference
- Hamilton, Robert W., and Jonathan R. Macey, Cases on Corporations Including Partnerships and Limited Liability Companies, 9th Ed., West Group, 2005.
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