The sole proprietorship is usually defined as a business that is owned and operated by one person. To establish a sole proprietorship, you need only obtain the needed licenses and begin operations. Hence, it is the most widespread form of small business organization.
Advantages of the Sole Proprietorship
- Ease of formation. There is less formality and fewer legal restrictions associated with establishing a sole proprietorship. It needs little or no governmental approval and is usually less expensive than a partnership or corporation.
- Sole ownership of profits. The proprietor is not required to share profits with anyone.
- Control and decision making vested in one owner. There are no co-owners or partners to consult.
- Flexibility. Management is able to respond quickly to business needs in the form of day-to-day management decisions as governed by both law and good sense.
- Relative freedom from government control and special taxation.
Disadvantages of the Sole Proprietorship
- Unlimited liability. The individual proprietor is responsible for the full amount of business debts that may exceed the proprietor's total investment. This liability extends to all the proprietor's assets, such as house and car. Obtaining proper insurance coverage may lessen additional problems of liability, such as physical loss or personal injury.
- Unstable business life. The enterprise may be crippled or terminated upon illness or death of the owner.
- Less available capital, ordinarily, than in other types of business organizations.
- Relative difficulty in obtaining long-term financing.
- Relatively limited viewpoint and experience. This is more often the case with one owner than with several.
NOTE: A small business owner might very well select the sole proprietorship to begin with. Later, if the owner succeeds and feels the need, he or she can form a partnership or corporation.