Business Law (part 33)

Introduction to Business Organization

(part A)

by

 Charles Lamson

An individual who is contemplating starting a business has a choice of several common types of business organizations. The number of owners, the formality in setting up the business, and the potential for personal liability are some of the factors that help distinguish the three most widely used types of business organization: sole proprietorship, partnership, and corporation.

Sole Proprietorship

A sole proprietorship is a business owned and carried on by one person called the proprietor. A sole proprietorship, the simplest and most common form of business, has a unique nature different from other businesses. It also has significant advantages and disadvantages as a result of the fact that one individual owns and runs it.

Nature

The proprietor directly owns the business. This means that the proprietor owns every asset of the business including the equipment, inventory, and real estate just as personal assets are owned. Although owned and run by one person, the business may have any number of employees and agents. However, the proprietor has ultimate responsibility for business decisions.

To start a sole proprietorship, an individual need only begin doing business. The law does not require any formalities to begin and operate this form of business. A license may be needed for the particular type of business undertaking. However, the type of business imposes this requirement, not the form of business organization.

It is equally easy to end a sole proprietorship. The proprietor simply stops doing business. Because the proprietor directly owns all the business assets, the proprietor need not dispose of them in order to go out of business. A sole proprietorship normally ends at the death of the proprietor. Such a business may be willed to another, but the proprietor has no assurance the business will be continued.

Advantages

The sole proprietorship form of business has two major advantages:

1. Flexible management
2. Ease of organization

Flexible Management. As the sole owner, the proprietor has significant flexibility in managing the business. Other people do not have to be consulted before business decisions may be made. The proprietor has full control and the freedom to operate the business in any way desired.

Ease of Organization. Since an individual need do nothing but start doing business, the sole proprietorship is the simplest type of business to organize. The law imposes no notice, permission, agreement, or understanding for its existence. If the proprietor intends to operate the business under an assumed name, a state law will normally require registration of the name with the appropriate state official. These laws are called fictitious name registration statutes. In registering a fictitious name, the business must disclose the names and addresses of the owners of the business and the business's purpose. This allows anyone who wishes to sue the business to know who to sue. A business operated under the proprietor's name and that does not imply additional owners does not have to be registered.

Disadvantages

The most significant disadvantage of the sole proprietorship form of business is the unlimited liability of the owner for the debts of the business. Unlimited liability means that business debts are payable from personal, as well as business, assets. If the business does not have enough assets to pay business debts, business creditors may also take the proprietor's personal assets. The sole proprietor's financial risk cannot be limited to the investment in the business.

In addition to unlimited liability, a sole proprietorship has additional disadvantages of limited management ability and capital. Since only one person runs a sole proprietorship, the management ability of the proprietor limits the business. The business also has only whatever capital the proprietor has or can raise. This may limit the size of the business.

A sole proprietor has liability for the activities of the business because the proprietor is the sole manager of the business. The proprietor is in a sense the business. The responsibility for all business decisions rests with the proprietor. A sole proprietor may not only be liable in damages for torts committed by the business, but also criminally liable for crimes. 

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 374-377*

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