Forming a Sole-Proprietorship.Sole-proprietorships are the most common and simple form of business organizations. They are formed by persons who own all or most of the business property and assets They are 100% responsible for all of the control, liabilities and management of a business. A sole-proprietorship, as its name states, has only one owner.
The sole-proprietorship is merely an extension of its owner: a sole-proprietor owns his own business, and no one else owns any part of it.
As the only owner, the sole-proprietor has the right to make all the management decisions of the business.
In addition, all the profits of the business are his. In return for his complete managerial control and sole ownership of profits, he assumes great liability: he is personally liable for all the obligations of the business.
All the debts of the business, including debts on contracts signed only in the name of the business, are his debts. If the assets of the business are insufficient to pay the claims of its creditors, the creditors may require the sole-proprietor to pay the claims using his individual nonbusiness assets, such as money from his bank account and the proceeds from the sale of his house. A sole-proprietor may lose everything if his business becomes insolvent. .. not being able to pay its obligations.
Hence, the sole-proprietorship is a risky form of business for its owner. In particular, if the owner has valuable personal assets and has a lot of money(great wealth).
In light of this risk, some people ask why any person would organize a business as a sole proprietorship? There are two reasons:
- First, the sole-proprietorship is formed very easily and inexpensively. A person need merely set up his business to establish a sole-proprietorship. No formalities are necessary. He may have a sole-proprietorship even though he does not intend to create one. Many people when taken to court before a judge over a business deal have found that they are sole-proprietors in the eyes of the law, like it or not!
These two reasons explain why the sole-proprietorship is the most common form of business in the United States.
- Second, few people consider the business-formmation decision. They merely begin their businesses by doing business. By default then, a person going into business by himself automatically creates a sole-proprietorship when he fails to choose another business form.
Because the sole-proprietorship is merely an extension of its owner, it has no life apart from its owner. It is not a legal entity. It cannot sue or be sued. Instead, creditors must sue the owner. The sole-proprietor, in his own name, must sue those who harm the business. A sole-proprietor may hire employees for the business, but they are employees of the sole proprietor. The sole-proprietor is the business and the business is the sole-proprietor. As this exists, in the eyes of the law, they are not separable.
Transferability of a Sole-ProprietorshipA sole-proprietorship is highly transferable(easy to sell). "Transferability of ownership " refers to the ability of an owner of a business to sell or convey that ownership interest to another. Transferability also refers to the impact such a transfer will have on an existing business venture. Transferability varies greatly among business organizations(corporations can be very difficult to sell).
The sole-proprietor is, essentially, the business. If a proprietor sells his business the proprietorship ends for that person, while a new one is formed by the buyer.
Duration of a Sole-ProprietorshipThe "duration of a business" is the measure of the business' ability to operate even upon the death, retirement, or other incapacity of the owner. The business' duration depends heavily on the form of business organization selected.
A sole-proprietorship usually terminates automatically upon the death or incapacitation of the owner/proprietor.
Capital Requirements of a Sole-ProprietorshipThe ability to raise capital for a business is limited by the nature of the business organization. The immediate and long-term financial needs of a business are very important factors in selecting a business organization.
Sole-proprietorships are the most limiting form of business organization in terms of raising capital.
The principal source of capital is the proprietor's personal wealth or personal credit-worthiness for borrowing purposes.
Taxation Considerations of a Sole-ProprietorshipFederal and state taxation have influence on the type of business organization to form. Tax treatment varies widely.
Typically, the income of a sole-proprietorship is taxed as the personal income of a proprietor.
The business itself does not pay taxes on its profits.
Registration and Licensure of a Sole-Proprietorship
When a sole-proprietor conducts business under an assumed name, that name must be registered with a state governmental agency, a local governmental agency or both. Most agencies have forms available and personnel who will assit with the application. Also, a sole-proprietor must be certain to obtain all required local and municipal business licenses before commencing business.