Agribusiness Library

LESSON L060006: SOLE PROPRIETORSHIPS

Objectives1. Describe characteristics of a sole proprietorship.

2. List advantages of a sole proprietorship.

3. List disadvantages of a sole proprietorship.

Key Terms•Business entity•Sole proprietorship•Unlimited liability

A sole proprietorship is a business entity with a single owner/operator.

A business entity is a professional organization offering something that has real existence.

The following factors characterize a sole proprietorship.

A. It is the oldest, most common, and simplest form of business organization.

B. One person can serve as the business decision-maker.

C. No registration with the state is required, as is necessary with a corporation or a limited liability company (LLC).

D. It is easily set up and maintained.

E. The owner is personally responsible for assets, income taxes, and business debts.

F. It is relatively simple to manage and control.

A sole proprietorship has several advantages.

A. The owner is his or her own boss. B. No legal formalities are involved

in forming or dissolving the business. C. The money the business makes

belongs to the owner. D. Decisions can be made quickly.

E. Start-up costs may be minimal.

F. A sole proprietorship is a good type of organization for a business: 1. That will remain small 2. That does not have great

exposure to liability 3. That does not justify the

expenses of incorporating and ongoing corporate formalities.

A sole proprietorship has several disadvantages.

A. Raising capital to start the business is difficult.

1. Banks are less willing to lend money to one person for a business venture.

2. Banks that approve loans may have higher interest rates.

B. The owner has unlimited liability. Both the business and personal

assets of the sole proprietor are subject to the claims of creditors.

When the owner assumes unlimited liability, he or she may lose all personal and business assets to pay bills or money owed to other parties.

C. The business ends if the owner dies.

D. This owner is responsible for the entire business.

E. The owner is responsible for personal health insurance.

F. The owner is responsible for withholding and paying all income taxes.

G. The sole proprietor must pay a self-employment tax, which consists of contributions to Social Security and Medicare. In addition, he or she must

pay estimated taxes throughout the year.

H. The sole proprietor may have to register the business name and pay local taxes for owning a business.

REVIEW•What are the characteristics of a sole proprietorship?

•What are some advantages of a sole proprietorship?

•What are some disadvantages of a sole proprietorship?