Reference no: EM133200539 , Length: 3 pages
Question #1. Discuss the advantages and disadvantages of a sole proprietorship.
A sole proprietorship is predominantly a business that is managed and owned by a single person. It remains the most straightforward and familiar kind of business body that is still being used in today's business world. There needs to be a clear understanding of what a sole proprietorship is, and the advantages and disadvantages of a sole proprietorship, and how it affects the way a business is formed and ran.
A sole proprietorship is seen as the most common form of business organization and also the simplest form of business organizations as well. There is only one owner of the business, who is called the sole proprietor (Cheeseman, 2016). Sole proprietorship is one of the options an entrepreneur can choose from when starting a business and is also a significant form for conducting business and professions. The selection depends on many factors, including the ease and cost of formation, the capital requirements of the business, the flexibility of management decisions, government restrictions, personal liability, tax considerations, and the like (Cheeseman, 2016). Since it is the most common form of business organization in the United States many small businesses and some amount of large one will be operated in this way. There are no formalities, and no federal or state government approval required (Cheeseman, 2016).
When forming a sole proprietorship, it cost saving and easy which helps a lot when someone is starting a new business and are able to save some money. The owner has the right to make all management decisions concerning the business, including those involving hiring and firing of employees (Cheeseman, 2016). It helps to give complete control to someone on how they choose to run their business and not having to get approval if they want to add or change something. With the sole proprietor having complete ownership of the business, it means they
have the right to receive all the profit the business brings. A sole proprietorship can be easily transferred or sold if and when the owner desires to do so; no other approval (e.g., from partners or shareholders) is necessary (Cheeseman, 2016). Once again, a sole proprietor will have complete control in the decisions that are made for the business, but they're also held responsible for whatever the outcome of those decisions is.
A sole proprietor bears the risk of loss of the business; that is, the owner will lose his or her entire capital contribution if the business fails (Cheeseman, 2016). Since a sole proprietor has complete ownership of the business then they will have unlimited personal liability. The personal liability of a sole proprietor for all the debts and obligations of a sole proprietorship (Cheeseman, 2016). Meaning that creditors are able to recover claims against the business from the personal assets of the sole proprietor which can include their home, automobile and bank accounts as well. Which can cause an induvial to file for bankruptcy causing a disruption to their financial stability. For example, a sole proprietors' access to the capital is limited to personal funds plus any loans he or she can obtain, and a sole proprietor is legally responsible for the business's contractors and the torts he or she or any of his or her employees commit in the course of employment (Cheeseman, 2016).
While creating a sole proprietorship is fairly easy and brings lots of pros, one must also consider the cons and how it can affect business in a negative way if things do not work out in one's favor. One of the reasons entrepreneurs prefer sole proprietorship over other business structures is not having to check with others like a boss or a supervisor since he or she is the owner of their business. A sole proprietorship is beneficial for an entrepreneur in what they can gain but it is also a risk they must be willing to take because they are held responsible if they're business fails.