How do entrepreneurs use their resources to start businesses?
Businesses come in all shapes and sizes, ranging from small home-based businesses to huge companies with offices around the world. Economists categorize businesses based on how they are organized. Most U.S. business organizations rail into one of three general categories: sale proprietorships, partnerships, or corporations. The most common is the sole proprietorship. a business owned and managed by one person.
In a sale proprietorship, the owner of the business the proprietor earns all the profits and is responsible for all the debts. This form of business can be simple to establish and easy to manage, with relatively low start-up costs.
This is the kind of business Timothy Redel chose when he started his photography business. Redel had traveled all over the world working as an assistant for other photographers before he went into business as a sole proprietor. To do so, he borrowed $10,000 from a bank. With these funds, he bought cameras and lighting equipment and set up shop, using his small apartment as a studio. He went on to become a highly successful photographer whose work has appeared in many national magazines.
The ease of starting a sale proprietorship is probably why about 7 out of 10 businesses are organized this way. It is a form of business that appeals to people who have a marketable skill or trade and want to work for themselves rather than a boss. A sale proprietor might be a plumber, a pet sitter, a caterer, a farmer, a consultant, or an artist like Redel.
For anyone thinking of starting a business, the sole proprietorship offers a number of advantages. Ense ojstart-up. There is little paperwork involved in starting a sole proprietorship. Though requirements vary by city and state, the basics include
Few restrictions. Sale proprietorships are the least regulated form of business. However, some regulations do apply to specific industries. For example, any business that serves food is subject to health department regulations.
Full decision-making power. A sole proprietor makes all business decisions without having to consult with partners or shareholders. The freedom to make decisions quickly in response to market changes can be a great advantage for a business owner.
Full profits and individual taxation. A sale proprietor keeps all the profits generated by the business after paying taxes. Sale proprietors pay personal income tax on their earnings. The business itself pays no taxes.
Ease of closing. Sole proprietors can dissolve their businesses easily if they choose to do so. However, they must pay off business debts and taxes.
Sale proprietorships also have disadvantages. Below are the three main drawbacks of this form of business.
Unlimited liability. The legal obligation to pay debts is known as liability. Sale proprietors have unlimited liability, or full responsibility for paying any debts their businesses take on. If a business does not have enough assets to repay its debts, the owner must use his or her personal assets such as a home, car, or bank account to do so. Unlimited liability is the tradeoff a sale proprietor makes for having complete control and reaping all the profits.
Many sale proprietors reduce their liability by organizing their business as a limited liability company. As in a sale proprietorship, the proprietor of an LLC pays personal income tax on the business’s profits. But the proprietor’s liability is limited to whatever he or she has invested in the company. This feature of LLCs has made them increasingly popular with business owners in recent years.
Limited growth potential. Because the success of a sale proprietorship rests on just one person often a novice entrepreneur with limited assets investors may be reluctant to lend money to a sale proprietor. Sale proprietorships can thus have difficulty obtaining the capital needed to expand. Business growth often depends on profits that can be reinvested in the enterprise.
Limited life. A sale proprietorship almost always ceases to operate if the owner dies, goes bankrupt, or is unable to run the business for any reason. New management does not usually take over this type of business. This lack of permanence may discourage some people from seeking work in a sale proprietorship. It may also make lenders reluctant to make loans to businesses with a single owner.
Disadvantages of Sole Proprietorships
Next Reading: 9.3 (What Kinds of Businesses Are Organized as Partnerships?)