Chapter Two Sole Proprietorships

Sole Proprietorship  A business owned and operated by one person

Sole Proprietorships ADVANTAGES  Easy to form and maintain  Inexpensive to form  Owner is sole decision- maker  Managerial discretion  All profits are retained by owner  Pass-through tax status DISADVANTAGES  Unlimited personal liability  Lack of continuity  Difficulties in raising capital  Possible lack of expertise in management

Personal Liability  Liability extending beyond what is invested in a business to an individual’s personal assets (also called unlimited liability)

Capital  Money used to form and operate a business or other venture

Name Considerations  Fictitious name: a name that must be registered with state or local officials because it does not disclose the surname of the business owner  DBA: ‘‘Doing business as’’; another name for a fictitious business name statement  Fictitious business name statement: record filed with public officials to identify the owner of a business operating under a name other than the owner’s surname

Key Features of Sole Proprietorships  Business is owned and managed by one person  Sole proprietor retains all profits and bears all losses  Sole proprietor’s personal assets can be reached to satisfy business obligations  Business is easily and inexpensively formed  All income earned (and loss incurred) is passed through to sole proprietor, who pays tax at appropriate individual tax bracket