Advantages of the Sole Proprietorship

THE SOLE PROPRIETORSHIP

SUMMARY

Selecting the Legal structure For Your Firm in the USA

Unit 6B

There are many reasons today for owner-managers of small businesses to look at the legal structure of their firms. The changing tax laws and fluctuating availability of capital are just two situations which require alert managers to review what legal structures best meet their needs.

All forms of business organization have advantages and disadvantages.

If you were to make an analogy between starting a business and playing a card game, you might say, "The game is just for fun, but business is business." Well, you would be right. But let's consider some important similarities.

The game requires skill, strategy, planning, and, most important, a thorough knowledge of the rules. Going into business requires skill (the knowledge of your craft or trade), and it also requires strategy and planning. Most important, to be successful in business, you must understand the rules (or the laws) by which you must conduct your business. All planning and strategy must consider the multitude of local, state, and federal laws and business practices that govern the operation of the business.

Before you enter the complex arena of business and the myriad of laws which influence your freedom of choice and mobility of action, you must first choose the legal structure for your business that will best suit your needs and the needs of your particular business. In order to intelligently select the legal structure for your business, you must ask yourself, "What are my alternatives?" So, let's now look at the nature of various legal business structures.

There are three principal kinds of business structures: the proprietorship, the partnership, and the corporation. Each has certain general advantages and disadvantages, but they must all be weighed to reflect your specific circumstances, goals, and needs. The sole proprietorship is the first form we'll consider.

The sole proprietorship is usually defined as a business which is owned and operated by one person. To establish a sole proprietorship, you need only to obtain whatever licenses you need and begin operations. Hence, it is the most widespread form of small business organization.

Base of formation. There is less formality and fewer legal restrictions associated with establishing a sole proprietorship. It needs little or no governmental approval and is usually less expensive than a partnership or corporation.

Sole ownership of profits. The proprietor is not required to share profits with anyone.

Control and decision making vested in one owner. There are no co-owners or partners to consult. (Except possibly your spouse.)

Flexibility. Management is able to respond quickly to business needs in the form of day to day management decisions as governed by various laws and good sense.

Relative freedom from governmental control and special taxation.