A sole proprietorship is a common way to start and run a small business. This lesson introduces how this form of ownership works and explains why many entrepreneurs choose it.
A sole proprietorship is a business established, owned, operated, and often financed by one person. The owner makes the business decisions and receives its profits. Legally, the owner and business are generally treated as one and the same—a feature that also creates important risks, discussed in Lesson 2.
All flashcards
What is unlimited liability in a sole proprietorship?
The owner is personally responsible for business debts and obligations, potentially beyond the business’s assets.
Who receives a sole proprietorship’s profits?
The owner receives the profits the business earns.
Why can a sole proprietorship have difficulty financing expansion?
The owner may have limited access to additional financing and may rely on personal funds or credit.
How can a sole proprietorship’s continuity depend on its owner?
The owner’s illness, retirement, loss of interest, or death may bring operations to an end.
Why may a sole proprietorship struggle to attract qualified employees?
It may be unable to match larger employers’ pay, benefits, or advancement opportunities.
Quiz questions
Why are sole proprietorships often relatively inexpensive to form?Answer: They usually have few formation requirements beyond applicable licenses and permits.
How are sole proprietorship profits generally treated for income tax purposes?Answer: They are reported as personal income on the owner’s individual tax return.
What does direct control allow a sole proprietor to do?Answer: Make business decisions without consulting partners or co-owners.
Why can ease of dissolution make a sole proprietorship suitable for testing an idea?Answer: The owner can sell or close the business without needing co-owners’ agreement.
What does having fewer government controls generally mean for a sole proprietorship?Answer: It has greater regulatory freedom than some other business forms, but must still follow applicable laws.
Based on Introduction to Business 2e by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.