CHAPTER 4
SELECTING A FORM OF ENTERPRISE
ISSUES
• Does the enterprise require co-operation between many participants?
o (pooling resources)
• Who does the enterprise belong to?
o (Shareholders as suppliers of capital, mutual company, consumer
cooperative, workers cooperative)
• Limited liability?
o (Responsible for debts)
• Will enterprise survive its founder?
• Costs? / Taxes?
• Opportunity to raise more finance?
CONSIDERATIONS WHEN CHOOSING
1. Legal personality
2. Limited Liability
3. Procedures of establishment
4. Parties involved
5. Attaining capital
6. Regulation and cost of compliance
7. Taxation
SOLE PROPRIETORSHIPS
A sole proprietorship is a business that is owned by one person. It is the simplest
form of business ownership and the easiest to start. In most instances, the owner
simply decides that he or she is in business and begins operations. Sole
proprietorships are most common in retailing, service, and agriculture.
ADVANTAGES OF SOLE PROPRIETORSHIPS
Most of the advantages that arise from sole proprietorship arise from the two main
characteristics of this form of ownership: simplicity and individual control.
Ease of start-up and closure
It is the simplest and cheapest way to start a business. Often, start-up requires no
contracts, agreements, or other legal documents. The legal requirements are often
limited to registering the name of the business and obtaining any necessary
licenses or permits. If the business does not succeed, the firm can be closed as
easily as it was opened.
, Pride of ownership
The owner deserves a great deal of credit for assuming the risks and solving the
day-to-day problems associated with operating sole proprietorships.
Retention of all profits
Because all profits become the personal earnings of the owner, the owner has a
strong incentive to succeed. This direct financial reward attracts many
entrepreneurs to the sole proprietorship form of business.
No special taxes
Profits earned by a sole proprietorship are taxed as the personal income of the
owner. They must report financial information on their personal income tax returns
and make estimated quarterly tax payments. They do not pay the special state and
federal income taxes that corporations pay.
Flexibility of being your own boss
A sole proprietor is free to make decisions about the firm’s operations. They can
switch from retailing to wholesaling, move location, open a new store or close an
old one without asking permission or waiting for anyone’s approval.
DISADVANTAGES OF SOLE PROPRIETORSHIPS
The disadvantages stems from the fact that these businesses are owned by one
person. Some capable sole proprietors experience no problems.
Unlimited liability
It is a legal concept that holds a business owner personally responsible for all the
debts of the business. If the business fails, the owner’s personal property can be
seized. It is perhaps the major factor that tends to discourage would-be
entrepreneur with substantial personal wealth from using the sole proprietor form of
business organization.
Lack of continuity
Legally, the sole proprietor is the business. If the owner retires, dies, or is declared
legally incompetent, the business essentially ceases to exist. In many cases –
especially when the business is a profitable enterprise – the owner’s heirs take it
over and either sell it or continue to operate it. An illness can be devastating if the
sole proprietor’s personal skills are what determine if the business is a success or a
failure.
Lack of money
Banks, suppliers, and other lenders usually are unwilling to lend large sums of
money to sole proprietorships. Only the sole proprietor can be held responsible for
repaying such loans and the assets are usually limited. Lenders also worry about
the lack of continuity of sole proprietorship. The limited ability to borrow money can
prevent a sole proprietorship for growing.
SELECTING A FORM OF ENTERPRISE
ISSUES
• Does the enterprise require co-operation between many participants?
o (pooling resources)
• Who does the enterprise belong to?
o (Shareholders as suppliers of capital, mutual company, consumer
cooperative, workers cooperative)
• Limited liability?
o (Responsible for debts)
• Will enterprise survive its founder?
• Costs? / Taxes?
• Opportunity to raise more finance?
CONSIDERATIONS WHEN CHOOSING
1. Legal personality
2. Limited Liability
3. Procedures of establishment
4. Parties involved
5. Attaining capital
6. Regulation and cost of compliance
7. Taxation
SOLE PROPRIETORSHIPS
A sole proprietorship is a business that is owned by one person. It is the simplest
form of business ownership and the easiest to start. In most instances, the owner
simply decides that he or she is in business and begins operations. Sole
proprietorships are most common in retailing, service, and agriculture.
ADVANTAGES OF SOLE PROPRIETORSHIPS
Most of the advantages that arise from sole proprietorship arise from the two main
characteristics of this form of ownership: simplicity and individual control.
Ease of start-up and closure
It is the simplest and cheapest way to start a business. Often, start-up requires no
contracts, agreements, or other legal documents. The legal requirements are often
limited to registering the name of the business and obtaining any necessary
licenses or permits. If the business does not succeed, the firm can be closed as
easily as it was opened.
, Pride of ownership
The owner deserves a great deal of credit for assuming the risks and solving the
day-to-day problems associated with operating sole proprietorships.
Retention of all profits
Because all profits become the personal earnings of the owner, the owner has a
strong incentive to succeed. This direct financial reward attracts many
entrepreneurs to the sole proprietorship form of business.
No special taxes
Profits earned by a sole proprietorship are taxed as the personal income of the
owner. They must report financial information on their personal income tax returns
and make estimated quarterly tax payments. They do not pay the special state and
federal income taxes that corporations pay.
Flexibility of being your own boss
A sole proprietor is free to make decisions about the firm’s operations. They can
switch from retailing to wholesaling, move location, open a new store or close an
old one without asking permission or waiting for anyone’s approval.
DISADVANTAGES OF SOLE PROPRIETORSHIPS
The disadvantages stems from the fact that these businesses are owned by one
person. Some capable sole proprietors experience no problems.
Unlimited liability
It is a legal concept that holds a business owner personally responsible for all the
debts of the business. If the business fails, the owner’s personal property can be
seized. It is perhaps the major factor that tends to discourage would-be
entrepreneur with substantial personal wealth from using the sole proprietor form of
business organization.
Lack of continuity
Legally, the sole proprietor is the business. If the owner retires, dies, or is declared
legally incompetent, the business essentially ceases to exist. In many cases –
especially when the business is a profitable enterprise – the owner’s heirs take it
over and either sell it or continue to operate it. An illness can be devastating if the
sole proprietor’s personal skills are what determine if the business is a success or a
failure.
Lack of money
Banks, suppliers, and other lenders usually are unwilling to lend large sums of
money to sole proprietorships. Only the sole proprietor can be held responsible for
repaying such loans and the assets are usually limited. Lenders also worry about
the lack of continuity of sole proprietorship. The limited ability to borrow money can
prevent a sole proprietorship for growing.
