Chapter Two

Sole Proprietorships

Sole Proprietorship

A business owned and operated by one person

Sole Proprietorships

ADVANTAGES Easy to form and

maintain Inexpensive to form Owner is sole

decision-maker Managerial discretion All profits are

retained by owner Pass-through tax

status

DISADVANTAGES Unlimited personal

liability Lack of continuity Difficulties in raising

capital Possible lack of

expertise in management

Personal Liability

Liability extending beyond what is invested in a business to an individual’s personal assets (also called unlimited liability)

Capital

Money used to form and operate a business or other venture

Name Considerations

Fictitious name: a name that must be registered with state or local officials because it does not disclose the surname of the business owner

DBA: ‘‘Doing business as’’; another name for a fictitious business name statement

Fictitious business name statement: record filed with public officials to identify the owner of a business operating under a name other than the owner’s surname

Key Features of Sole Proprietorships Business is owned and managed by one

person Sole proprietor retains all profits and bears

all losses Sole proprietor’s personal assets can be

reached to satisfy business obligations Business is easily and inexpensively formed All income earned (and loss incurred) is

passed through to sole proprietor, who pays tax at appropriate individual tax bracket