Sole Proprietorship

The popularity of the sole proprietorship results from its simplicity and flexibility.  The owner directs business activities and may supply all management and labor utilized by the business. However, employees can supply either or both without altering the nature of the sole proprietorship.

A sole proprietorship can be established, modified, bought, sold, or terminated very quickly. No business planning or organizational arrangements (bylaws, organizational charter, etc.) are required when a sole proprietorship is established, an approach that often works to the proprietor's detriment. Other than routine permits and licenses required for your business activities, neither public notification nor legal assistance is required to start, terminate, redirect, or modify the business. The proprietor can decide to start a business and almost immediately can say, "I'm open for business and I'm my own boss."

The owner can change the size or complexity of the business unit whenever there is financial capacity to do so. Children can be involved in both business and family activities as determined by their age, interests, abilities, and parents' wishes. Depending on personalities and interests, the involvement of family members in the business is relatively unrestricted.

Limitations of Sole Proprietorships:

The sole proprietorship has a number of limitations. Many result from the lack of a separate business entity. Even though there are many financial management and tax reasons not to do so, mingling of business and household finances and operating with a resource base that's primarily the family's net worth occurs in many sole proprietorships. The resulting limitations include:

• Everything the proprietor and family own is at risk in both personal and business activities unless nonbusiness assets are protected in a trust or other isolating mechanism
• The resource base of the business unit may be so limited that credit availability and capacity to respond to business opportunities is moderately to severely restricted;
• The business ends with the death of the proprietor and, if business activity is to continue, a new business must be established by the survivors;
• Unless succession is carefully planned, each generation must purchase or inherit the business assets paying any applicable taxes and costs;
• Mixing business and household finances can make it difficult to measure business financial performance and profitability, and may lead to loss of equity that is not recognized until the business is in serious financial difficulty;
• Conflicts or disagreements within the family can immobilize the business unit and prevent needed decision making.

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