Chapter 8: Business Organizations
Section 1: Sole
Proprietorships
• First business decision is what form of
business organization best serves their
interests
–Business organization- establishment
formed to carry on commercial
enterprise
• Company or firm
• Sole proprietorships are the most
common
The Role of Sole Proprietorships
• Business owned & managed by a single
individual
–That person owns all of the firm’s profits &
is responsible for all of the firm’s debts
–Most sole proprietorships are small
–All together, sole proprietorships generate
only about 6 percent of all U.S. sales, but
make up 75% of all businesses
Characteristics of Proprietorships
• Most sole proprietorships earn modest incomes.
• Many proprietors run their businesses part-time.
Advantages of Sole Proprietorships
–Ease of Start-Up
• With a small amount of paperwork &
legal expenses, just about anyone can
start a sole proprietorship.
• Must meet a small number of
government requirements
–Authorization- business license
–Site permit
–name
Relatively Few Regulations
• Least-regulated form of business organization
• Zoning laws- may prohibit sole proprietorships
from operating businesses out of their homes
Sole Receiver of Profit
• After paying taxes, the owner of sole
proprietorship keeps all the profits.
Full Control
• Can run their businesses as they wish
• Fast, flexible decision making
Easy to Discontinue
• Besides paying off legal obligations, such as
taxes & debt, no other legal obligations need
to be met to stop doing business
Disadvantages of Sole Proprietorships
• Comes with a high degree of responsibility
• Limited access to resources, such as physical
capital
–Human capital can also be limited, because
no one knows everything
–Banks are sometimes unwilling to offer
financing in the early days of a business
• Lack of permanence
–Whenever an owner closes shop due to
illness, retirement, or any other reason, the
business ceases to exist
–Trouble finding & keeping good employees
–Cannot offer the security & advancement
opportunities that many employees look for
–Little fringe benefits
–Cannot count on anyone else to maintain
the business
• The biggest disadvantage is unlimited
personal liability.
–Liability is the legally bound obligation
to pay debts.
–Fully & personally responsible for all
debts
–Can ruin a person’s finances