experiment 1

experiment 1

text reading experiment

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. According to the Internal Revenue Service, more than 70 percent of all businesses are organized as sole proprietorships.

Most sole proprietorships are small, however. All together, they generate only about 4 percent of all sales in the United States.

Many types of businesses can flourish as sole proprietorships. Look around your neighborhood or town. It is more likely than not that your local bakery, your barber shop or hair salon, your bike-repair shop, and the corner grocery store are all sole proprietorships.

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

Draw Inferences Why do you think more than 70% of all businesses are organized as sole proprietorships?

Open Ended

Compare and Contrast How is someone with entrepreneurial spirit different from someone who has worked for a single company for many years?

Open Ended

Use Visual Information Look at the circle graph that shows characteristics of a sole proprietorship. What amount do most sole proprietors report on their taxes? What does this tell you about the size of most sole proprietorships?

Advantages of Sole Proprietorships

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. Typically, though, sole proprietors must meet the following minimum requirements:

Authorization Many sole proprietors must obtain a business license, which is an authorization from the local government to operate a business. Certain professionals, such as doctors and day-care providers, may also need a special license from the state.

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.

This paperwork often takes only a day or two to complete. Because they require little legal paperwork, sole proprietorships are usually the least expensive form of ownership to establish.

The federal government offers aid to entrepreneurs to help their businesses grow. Once a business has been started, the federal government’s Small Business Administration provides a variety of loan programs and other support.

Advantages of Sole Proprietorships

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. For example, a soft pretzel stand would be subject to health codes, and a furniture refinishing business would have to follow laws about disposing of dangerous chemicals.

Sole proprietorships may also be subject to local zoning laws. Cities and towns often designate certain areas, or zones, for residential use and for business. Zoning laws may prohibit sole proprietors from operating businesses out of their homes.

Advantages of Sole Proprietorships

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.

Advantages of Sole Proprietorships

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. These entrepreneurs can respond quickly to changes in the marketplace. Finally, if sole proprietors decide to stop operations and do something else for a living, they can do so easily. They must, of course, pay all debts and other obligations, such as taxes, but they do not have to meet any other legal obligations to stop doing business.

Open Ended

Maggie wants to name her artificial flower arrangement business using her name, Maggie Lightner, Inc. Her friend Sally thinks she should name it “Forever Flower Designs.” Think about the advantages of a sole proprietorship. Why might Maggie want to consider Sally’s idea?

Open Ended

Draw Conclusions Why do you think zoning laws may prohibit some sole proprietors from operating businesses out of their homes?

Open Ended

Assess an Argument A sole proprietor has the ability to set flexible business hours. Why is this an advantage over other types of businesses?

Disadvantages of Sole Proprietorships

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. Business debts can ruin a sole proprietor’s personal finances.

Disadvantages of Sole Proprietorships

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.

Physical capital may not be the only resource in short supply. Human capital may be lacking, too. A sole proprietor, no matter how ambitious, may lack some of the skills necessary to run a business successfully. For example, you may be great at sales but not at accounting. You may love working outdoors as a landscaper but hate to call on people to drum up business. Some aspects of the business suffer if the owner’s skills do not match the needs of the business.

Disadvantages of Sole Proprietorships

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.

Sole proprietorships often have trouble finding and keeping good employees. Small businesses generally cannot offer the security and advancement opportunities that many employees look for in a job. In addition, a sole proprietorship usually has limited access to capital, which means that most small business owners lack the resources to offer workers fringe benefits. Fringe benefits are payments to employees other than wages or salaries, such as paid vacation, retirement pay, and health insurance. Lack of experienced employees can hurt a business. Once again, the other side of total control is total responsibility: a sole proprietor cannot count on anyone else to maintain the business.

Open Ended

Use Visual Information Study the graph titled “Sole Proprietorship Survival.” If there were 100 new sole proprietorships in Year 1, how many were still in business in Year 3

Open Ended

Draw Inferences A sole proprietor may have to turn down work if he or she does not have enough time to do it. The obvious cost of this is the loss of money the sole proprietor would have received for the work. What is a hidden cost of turning down work?

Open Ended

Draw Conclusions Why might a sole proprietor have a difficult time taking vacation if they can set their hours to be whatever they want?

Multiple Choice

Which best describes a sole proprietorship?

• a business owned by two partners

• a business owned by an individual

• a business owned by a corporation

• a business owned by the government

Multiple Choice

How does a lack of financial resources for fringe benefits affect a sole proprietor's ability to run a business?

• It makes it difficult for the owner to make a profit.

• It makes it difficult for the owner to promote the business.

• It makes it difficult for the owner to pay competitive wages.

• It makes it difficult for the owner attract good employees.

Multiple Choice

Why is liability the biggest disadvantage of a sole proprietorship?

• The owner may not be able to complete work on time.

• The owner might be unable to pay his or her employees.

• The owner may have difficulty getting loans from banks.

• The owner could lose personal property if the business fails.

Multiple Choice

Which of the following businesses would most likely be subject to laws that regulate the disposal of dangerous chemicals?

• a greeting card company

• a shoe store

• an auto repair shop

• a dog-walking business

Multiple Choice

Which advantage of a sole proprietorship could also be a disadvantage?

• A sole proprietor has full control.

• A sole proprietor can easily start a business.

• A sole proprietor is the sole receiver of profit.

• A sole proprietor has to follow relatively few regulations.