ECONOMICS TOPIC 5 LESSON 1

ECONOMICS TOPIC 5 LESSON 1

Sole Proprietorships

ESSENTIAL QUESTION

How can businesses and labor best achieve their goals?

The Role of Sole Proprietorships

A sole proprietorship is a business owned and managed by a single individual. In this type of business organization, which is the ownership structure of a company or firm, the lone entrepreneur earns all of the firm’s profits and is responsible for all of its debts. This type of company is by far the most popular in the United States.

Entrepreneurial Spirit

In some ways, the word spirit in the term entrepreneurial spirit says it all. There is a difference between people who expect to spend their lives working for someone else and those who want to work for themselves. Some people are driven by an idea or ambition to create their own jobs. But ambition is only a starting point. To be successful, sole proprietors have to be risk takers. They have to be willing to risk failure for greater satisfaction, and perhaps greater financial gain.

Open Ended

Analyze Graphs Based on the graph, how would you describe the size of most sole proprietorships?

Multiple Choice

Identify Which statement about sole proprietorships is true?

• Sole proprietorships can be owned by more than one person.

• Sole proprietorships are the most common form of business organization in the United States.

• Sole proprietorships generate about 40 percent of all sales in the United States.

• Sole proprietorships do not have to pay employment taxes.

Advantages of Sole Proprietorships

While you need to do more than just hang out a sign to start your own business, a sole proprietorship is simple to establish. It also offers the owner several advantages.

Easy to Start and End

Easy start-up is the main advantage of the sole proprietorship. With just a small amount of paperwork and legal expense, just about anyone can start such a business. The exact requirements vary from city to city and state to state. 

Easy to Start and End

Authorization Many sole proprietors must obtain a business license, which is an authorization from the local government to operate a business.

Site permit If not operating the business out of his or her home, a sole proprietor must obtain a certificate of occupancy to use another building for business. Some zoning laws prohibit doing business in a residential area.

Name If not using his or her own name as the name of the business, a sole proprietor must register a business name.

Relatively Few Regulations

A sole proprietorship is the least-regulated form of business organization. Even the smallest business, however, is subject to some regulation, especially industry-specific rules.

Sole Receiver of Profit

A major advantage of the sole proprietorship is that the owner gets to keep all profits after paying income taxes. If the business succeeds, the owner does not have to share the success with anyone else. The desire for profits motivates many people to start their own businesses.

Open Ended

Analyze Charts How would the profit of a sole proprietorship change if its expenses increased and its income remained the same?

Full Control

Another advantage of sole proprietorship is that sole proprietors can run their businesses as they wish. This high degree of freedom appeals to entrepreneurs. Fast, flexible decision making allows sole proprietors to take full advantage of sudden opportunities. 

Multiple Choice

Cite Evidence Why is it easy to start a sole proprietorship?

• Sole proprietors do not need to file a lot of paperwork to start a business.

• Sole proprietors are not subject to zoning laws.

• Sole proprietors do not have any legal obligations.

• Sole proprietors do not need to follow any government regulations.

Disadvantages of Sole Proprietorships

As with everything else, there are trade-offs with sole proprietorships. The independence of this form of business organization comes with a high degree of responsibility.

Unlimited Personal Liability

The biggest disadvantage of sole proprietorship is unlimited personal liability. Liability is the legal obligation to pay debts. Sole proprietors are fully and personally responsible for all their business debts. If the business fails, the owner may have to sell personal property—such as a car or home—to cover any outstanding obligations.

Limited Access to Resources

Suppose you start a landscaping business that grows quickly. You might need to expand your business by buying more equipment. But as a sole proprietor, you may have to pay for that equipment out of your own pocket. Banks are sometimes unwilling to offer loans to a business that has not been operating for very long. This makes it difficult or impossible for many sole proprietorships to expand quickly.

Lack of Permanence

A sole proprietorship has a limited life. If a sole proprietor dies or retires, the business simply ceases to exist if there is no one willing to buy it or run it. The same can happen if the owner suffers an extended illness or loses interest in the business.

Fill in the Blanks

Multiple Choice

Distinguish Which is a disadvantage of sole proprietorships?

• full control

• few regulations

• easy to start and end

• limited access to resources

Open Ended

How can businesses and labor best achieve their goals?