Page 703 - Encyclopedia of Business and Finance

eobf_S 7/5/06 3:21 PM Page 680

Sole Proprietorship

of type of ownership, no legal formalities are required to
start or operate the business. The owner is responsible for Elements of a business plan
securing and investing the funds for the business. These
funds may come from the owner’s existing or borrowed
financial resources. I. Cover sheet
II. Statement of purpose
The Internal Revenue Service (IRS) permits one
III. Table of contents
exception to the “one sole owner” rule. If the spouse of a
A. The business
married sole proprietor works for the firm but is not clas- 1. Description of business
sified as either a partner or an independent contractor, the 2. Marketing
3. Competition
business may still considered to be a sole proprietorship 4. Operating procedures
and forgo having to submit a partnership income tax 5. Personnel
6. Business insurance
return. Also, the sole proprietorship can avoid self-
B. Financial data
employment taxes. 1. Loan applications
If the owner’s true name is used, such as “John Smith 2. Capital equipment and supply list
3. Balance sheet
Auto Repair,” there is ordinarily no problem in selecting a 4. Break-even analysis
name for the sole proprietorship. However, care must be 5. Pro-forma income projections (profit and loss statements)
• Three-year summary
taken if a fictitious name is contemplated. The owner • Detail by month, first year
must register the name with the county to see whether the • Detail by quarters, second and third years
• Assumptions upon which projections were based
name duplicates that of another business. Even if it does
6. Pro-forma cash flow
not, the owner must submit a “doing business as (DBA)” C. Supporting documents
form to the county, or, in a few states, to the secretary of • Tax returns of principals for last three years
• Personal financial statement
state.
• Copy of franchise contract and all supporting documents
if appropriate
D. Copy of proposed lease or purchase agreement for building space
ADVANTAGES
• Copy of licenses and others legal documents
An owner of a sole proprietorship gets to keep all profits • Copy of resumes of all principals
• Copies of letters of intent from suppliers, and so forth
derived from the operation. The owner may even share
any portion of the profits (and losses) with another person
or persons. Figure 1
The owner has the authority to make all the decisions
relating to the business. Since there are no co-owners,
there is no need to hold policy-meeting sessions or form that the proprietor owns a home, equipment, and other
any group similar to a board of directors. The owner, of business investments totaling $365,000.
course, must bear the responsibilities that accrue from the The following shows the picture of the owner’s liabil-
decisions made.
ity:
The owner may hire employees or work with inde-
pendent consultants and still retain the sole proprietorship Total liability of the proprietorship $190,000
form of ownership. Even if these employees or independ- Capability of the proprietorship in settling the lia-
ent consultants are requested to offer their opinions relat- bility $85,000
ing to the firm’s business decisions, the opinions are
Extent to which the owner’s personal assets (totaling
considered to be only recommendations. The owner can-
$365,000) must be used to settle the debt
not abdicate any responsibility for the outcomes fostered
$105,000
by these recommendations.
Owners of sole proprietorships have severe potential
DISADVANTAGES liabilities from customers, competitors, lenders, employ-
Unlimited liability is the major disadvantage borne by the ees, and even government. The cost of liability insurance
sole proprietorship. The owner is financially responsible or of defending against a lawsuit is beyond the financial
for satisfying all business debts and/or losses suffered by capability of many business firms. For this reason, most
the firm, even to the point of sacrificing his or her per- individuals holding somewhat extensive personal assets do
sonal or other business interests to pay any liabilities. For not ordinarily use the sole proprietorship form of owner-
example, assume a lawsuit inflicts a debt of $190,000 on ship. Instead, an alternative form of ownership is often
a sole proprietorship that is able to contribute only used, such as corporation or special forms of partnership,
$85,000 toward settlement of the liability. Further assume that eliminates the unlimited liability.

680 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION