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$udySkilborBusiness 347

Chapter4SoleProprietorship

Thereare hreeverycommon ormsof business wnerships.The first is soleproprietor-

ship. The second s partnership. The third is the corporation. Thereare moresole

proprietorshipsn this country hanany other orm ofbusiness wnership.Theydonot,

however,account or mostbusinesseceiptsandnetprofits. In ttris chapter ouwill learn

aboutsoleproprielorships.Theiradvantages nd disadvantages ill be discussedoo.

SoleProprietorshipsand Their Advantages

SoleProprietorships. A soleproprietorship s definedas a business wnedby a single

personwho receivesall profis and assumes ll risks. Thereare certain actsaboutsole

proprietorshipswhich you shouldknow. Owners of this form of businessarc 'self-

employed";usually he owners re heactivemanagers. his formof businesss theoldesr

form of business rganization. t isalso heeasiestypeof businesso start,operaE,md

end. This maybe the reasonwhy it is themostcommon orm of organization. n Frgure

4-1 youseea comparison f the hreemostcommon ormsof businesses.

Figure4-1. Comparisonof Three tr'ormsof Business

Number f Flrms Buslness ecelpts(Soles)

$lsote ProprletorsNpsf] Coporotions @ Portnerships

From:StatlstlcalAbstract of theUnited States'1985, 05thedition(U. S. Deparrnentof Commerce,Bureau of the Census,U. S.

Govemment rintingOffice,Washington, ,C.),pg. 5f 6.

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348 Samplehapters

You see hat therearemoresoleproprietonhips hanpartnerships r corporations. AIso

depicted n Figure 4- is thatpercentagef sales or soleproprietorshipss far lowerthan

that for corporations.

Advantages.Soleproprietorships avecertainadvantages.A soleproprietorships easy

and nexpensiveo set up. Thereare major reasonswhy this s so. Fint, nostatecharter

isneeded. econd,nolegalagreementorfeeisrequired"fastateorcitytcenseisrequired,

it iseasy o attain. Theonly other egal equirements that heactivity itselfmustbe egal.Consideranexampleof a soleproprietorshipsimplysetup. Mr. Jones enteda stand o

sell some roduce.At thispoint,hewas n businesssa soleproprietor.

Anotheradvantagef soleproprietorships that t allows heownermuch reedom.The

ownercanmakebusinessdecisionswithoutconsultingaparfirerorboardofdirectors.e/

she an akeactionondecisionsromptly.Theownercanalsochangemethods f doing

businessuickly.

A thirdadvantagef ilre soleproprietorships that t encourageshe owner odo well. All

profitsgo o heproprielor.Thismotivates im/her o workhardand o usegoodudgment.

How Certain Disadvantages ffect SoleProprietorships

Inability to raise arge sumsof capital. often, the sole owner sunable o raiseenough

capital, indering iffier fromstarting r expandinghebusiness, apital is theamount

of moneyhat heproprietorhasandcanborrow o nvest n thebusiness.Therearecertain

reasons hy theproprietor f a soleproprietorshipasdifficulty raisingcapital. Banks

oftenlendnomorethanthevalueoftheproprietor'spersonalassets.econd,aproprietor's

credit ating s usually ower tran hatof a arge irm, so a highernterest ateon money

bonowedmustbepaid.hird,theproprietorcannotatEactinvestorsbysharingownership

of thebusiness.Finally,once n operation, rofitsaloneare often too low to afford

expansion.Changingo someother ormof business wnenhip maybe required orexpansion.

Limitedlife.A soleproprietorships egallyendedupondeattr,bankruptcy,imprisonment,

or nsanity f theowner. t isoftensomucha one-personusinesshat t isprofitable nly

as ongas heowner sactive. Due o tsuncertainimited ife,otherbusinessesreoften

unwilling o make ong-terminancial ommitments ith theowner.

anfimited iabilityfor debts.Unlimiled iabilirymeanshecreditorsmay ake heowner's

personal ossessionsfdebtsarenotpaidby thebusiness.f thebusinessails, heowner

may osemostof hMer personalavings ndpossessions.

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StudykillsorBusiness 349

Lack of assistancen managemenL Theownermust often perform all functionsofmanagementn the business.He/shemay serveas generalmanager, alesmanager,purchasingmanager,dvertisingmanager, ccountant,ndpersonnelmanager.Manypeople renotqualifiedo ulfill all managementunctions,ocertain reas f thebusinesssuffer.

operationalproblems.problemsin operating anhinder heprogressmadeby a soleproprietorship.certainoperational roblemsdoarise.First,poor ocationand nadequatebuildingsandequipmentmayhinderprogress.Second,rheneedtopayhighenoughwagesto attract oodemployees aynotbemet.Third,purchasing arge olumeoget hebestdiscountmaybe mpossible.

Summary

Averycommonformofbusinessownershipisthesoleproprietorship.Therearemoresoleproprietorshipsn our countrythananyother orm of business rganization.Thereareseveraldvantagesf thesole roprietorship.t iseasyosetup. It allowsheownermuchfreedom.n addition,t encouragesheownero dowell. There reseveral isadvantages

of soleproprieorships oo. It is difficult for thesoleownerto raisemoney o startandexpand is/herbusiness.A soleproprietorships legallyendedf somethingappensotheowner.Theowner isks osinghis/her ersonalossessionsf it fails.Theownermustfultill all functions f management.niqueoperational roblemsmayaffect ts success.

KEYTERMS

capital

unlimitediabiliry

soleproprietorship

QUESTTONS ND EXERCISES

l. Why aremostsmallbusinessesoleproprietorships?

2. Describehreedisadvantagesf asoleproprietorship.

3. What scapital?

4. WhatdoesunlimitBdiabilirymean?

5. How manysoleproprietorshipsre n thearea n whichyou ive?