Question

10. Although most new firms start out as sole proprietorships, few large firms are organized this way. Why is the sole proprietorship such a popular form of ownership for new firms? What features of the sole proprietorship make it unattractive to growing firms? (Chapter 5);

Answer 1

Although most new firms start out as sole proprietorships, few large firms are organized this way. Why is the sole proprietorship such a popular form of ownership for new firms?

A sole proprietorship is a business venture with only one owner. Professionals, retailers and service providers can be sole proprietors. Sole proprietorships have no separate legal standing; the business is the owner .

• Although this fact means that sole proprietors are liable for any debts incurred by the business or judgments against the business, many consider the benefits to outweigh the disadvantages.

• The major advantages that make sole proprietorships the most common form of business ownership revolve around simplicity and economics.

• It’s easy o start up, as soon as you start providing a service or selling your merchandise, you own a sole proprietorship.

• The sole proprietor can maintain complete control over all aspects of the business.

• Incorporated businesses often pay income tax twice, first on the business earnings and then on personal income when you draw a salary or take distributions from the company

• If you decide you want to sell your sole proprietorship, you do not have to seek approval from shareholders, partners or members. If you decide you want to retire, you can simply stop doing business.

What features of the sole proprietorship make it unattractive to growing firms?

• Unlimited liability: sole proprietorship, is personally liable for all debts and actions of the

company. Unlike a corporation or an LLC, your business doesn’t exist as a separate legal entity. All personal wealth and assets are linked to the business If you operate in a higher risk business, such as manufacturing or consumables, the cost to benefit ratio is favorable toward a corporate structure.

• Lack of financial controls: The looser structure of a proprietorship won’t require financial

statements and maintaining company minutes as a corporation. The lack of accounting controls can result in the owner being lax about financial matters, perhaps falling behind in payments or not getting paid on time. It can be a serious issue if financial controls are not strictly managed.

• Difficulty in raising capital: Growing your small business will require cash to take advantage of

new markets and more opportunities. An unrelated investor has less peace of mind concerning the use and security of his or her investment, and the investment is more difficult to formalize; other types of business entities have more documentation. Outside investors will take your company more serious if you are a corporation.

Some features that would make the sole proprietorship unattractive to growing firms would be most people do not have the resources to start a large business and it is difficult for one person to control all aspects of a corporation.