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CH 3] Business 101 3-5

All entrepreneurs will face the issue of the type of legal form to use for the
structural basis for their company. In essence, aspiring business owners have three
business forms to choose from: (1) Sole Proprietorship, (2) Partnership, and (3)
Corporation.

Sole Proprietorships
When you think of going into business for yourself, you are thinking of a business sole proprietorship
ownership form known as a sole proprietorship; this is an organization owned and Ownership (and usually
usually operated by a single individual. It is the simplest form of ownership and operation) of an organization
easiest to enter. Legally speaking, there exists no distinction between the sole by one person.
proprietor as an individual and as the business owner. A business's assets, its earnings,
and debts are the owners and though one may account for business income and
personal income, legally they come under the owner’s umbrella of ownership.
Although sole proprietorships are used in a variety of industries, they are concentrated 3
primarily among small businesses such as mechanics shops, retail outlets, service
organizations like restaurants, and farms and ranches.

Advantages of Sole Proprietorships. Sole proprietorships offer advantages many
business owners like, such as retention of all profits; they are easy to form and
dissolve, low start-up costs, relatively free from regulations (as compared to
corporations and partnerships). The owner is in direct control of the business, and
there are tax advantages to the small business owner. In fact, our tax laws are meant to
advantage those individuals who are in business for themselves.
Legal requirements. There are a minimum of legal requirements and hurdles
when opening a sole proprietorship. Generally, the only legal requirements for starting
a sole proprietorship are filing a fictitious name statement at the county courthouse
and acquiring the necessary operating licenses when required. The fictitious name
statement is used to protect dual use of the same name and many communities have
licensing requirements for restaurants, motels, retail stores and repair shops. One
therefore needs to review local statutes and agencies on their regulations. Many
neophyte entrepreneurs mistakenly believe that they need permission to go into
business, which is not the case.
Pride of ownership is a driving force to entrepreneurship as well as the aspect of
direct control. Owners get to make the decisions, and they can make those decisions
without consulting others. Prompt action can be taken when it is needed and “trade
secrets” can be preserved. All of these contribute to the personal satisfaction of “being
the boss.” A fallacy of ownership is that the owner doesn’t have to work for someone
else or have a boss. The fact is we all work for someone else and we do have a boss,
and they are the customer.

Disadvantages of Sole Proprietorships. Some disadvantages of the sole
proprietorship include: financial limitations restricted to the personal capital resources
of the owner, management restrictions and technical expertise limitations, unlimited
liability (relief can be garnered through bankruptcy), and a lack of continuity.
Financial limitations to personal capitalization. Sole proprietorship capital
resources are general limited to the ability of the owner to raise money. The capital
resources are generally limited to the owner's personal funds and the money that can
be borrowed. Financial institutions are reluctant to loan money to a start-up business
because of the lack of business history, lack of market share, and insufficient
ownership equity that start-ups general possess. Financing limitations can retard
expansion of the sole proprietor's business, the owner must learn to “grow a business.”
Management restrictions and technical expertise limitations. Sole proprietors
get to wear many different hats in their business; they get to be the general manager,
the personnel manager, financial manager, the business buyer, the sales trainer, the
sales representative, the janitor, the manufacturing engineer, and the production
supervisor.
Businesses often fail because the owner lacks the technical expertise to make his

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