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What Is a Sole Proprietorship?

A sole proprietorship is a simple type of business structure that is owned and operated by
the same person. It does not involve many of the complex filing requirements associated
with other types of business structures such as corporations. Sole proprietorships allow
persons to report business income and expenses on their individual tax returns.
Sole proprietorships are attractive to small investors because they are relatively easy to
start up. Also, the owner is entitled to all the profit that the sole proprietorship collects. On
the other hand, sole proprietorships can be risky because there is no separation between the
owner and the business.
In other words, the owner remains personally liable for any losses or debts that the sole
proprietorship incurs. They can also be held legally responsible for violations committed by
the business or its employees. A sole proprietorship can best be summed up by the phrase,
"You are the business."

What Are Some of the Advantages of a Sole Proprietorship?


There are many reasons why a person would choose to start their business up using a sole
proprietorship structure. Some of the main advantages of sole proprietorships include:

Ease of formation: Starting a sole proprietorship is much less complicated than


starting a formal corporation, and also much cheaper. Some states allow sole proprietorships
to be formed without the double taxation standards applicable to most corporations. The
proprietorship can be named after the owner, or a fictitious name can be used to enhance
the business marketing.

Tax benefits: The owner of a sole proprietorship is not required to file a separate
business tax report. Instead, they will list business information and figures within their
individual tax return. This can save additional costs on accounting and tax filing. The
business will be taxed at the rates applied to personal income, not corporate tax rates.

Employment: Sole proprietorships can hire employees. This can lead to many of the
benefits associated with job creation, such as tax breaks. Also, spouses of the business
owner can be employed without having to be formally declared as an employee. Married
couples can also start a sole proprietorship, though liability can only assumed by one
individual.

Decision making: Control over all business decisions remains in the hands of the
owner. The owner can also fully transfer the sole proprietorship at any time as they deem
necessary.

Solemen Vs Slemn
Mr Aron Salomon made leather boots and shoes in a large Whitechapel High
Street establishment. His sons wanted to become business partners, so he turned the business
into a limited company. The company purchased Salomon's business for 39,000, which was an
excessive price for its value. His wife and five eldest children became subscribers and two
eldest sons also directors (but as nominee for Salomon, making it a one-man business). Mr
Salomon took 20,001 of the company's 20,007 shares. Transfer of the business took place on
June 1, 1892. The company also gave Mr Salomon 10,000 in debentures (i.e., Salomon gave
the company a 10,000 loan, secured by a floating charge over the assets of the company). On
the security of his debentures, Mr Salomon received an advance of 5,000 from Edmund
Broderip.
Soon after Mr Salomon incorporated his business a decline in boot sales, exacerbated by a
series of strikes which led the Government, Salomon's main customer, to split its contracts
among more firms to avoid the risk of its few suppliers being crippled by strikes. Salomon's
business failed, defaulting on its interest payments on the debentures (half held by Broderip).
Broderip sued to enforce his security in October 1893. The company was put into liquidation.
Broderip was repaid his 5,000. This left 1,055 company assets remaining, of which Salomon
claimed under his retained debentures. This would leave nothing for the unsecured creditors, of
which 7,773 was owing. When the company failed, the company's liquidator contended that
the floating charge should not be honoured, and Salomon should be made responsible for the
company's debts. Salomon sued.

What Are the Disadvantages of Sole Proprietorships?


Forming a sole proprietorship does involve some risks, mainly to the owner of the business,
as legally speaking they are not treated separately from the business. Some disadvantages
of sole proprietorships are:

Liability: The business owner will be held directly responsible for any losses, debts,

or violations coming from the business. For example if the business must pay any debts,
these will be satisfied from the owners own personal funds. The owner could be sued for
any unlawful acts committed by the employees. This is drastically different from
corporations, wherein the members enjoy limited liability (i.e., they cannot be held liable for
losses or violations)
Taxes: While there are many tax benefits to sole proprietorships, a main drawback is

that the owner must pay self-employment taxes. Also, some tax benefits may not be
deductible, such as health insurance premiums for employees
Lack of continuity: The business does not continue if the owner becomes

deceased or incapacitated, since they are treated as one and the same. Upon the owners
death, the business is liquidated and becomes part of the owners personal estate, to be
distributed to beneficiaries. This can result in heavy tax consequences on beneficiaries due
to inheritance taxes and estate taxes
Difficulty in raising capital: Since the initial funds are usually provided by the
owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or
other money-generating investments like corporations do
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