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Legal Dictionary

sole proprietorship

Legal Definition of sole proprietorship

Related terms


Definition of sole proprietorship

Noun

sole proprietorship (plural sole proprietorships)

  1. (law) A business that is wholly owned by a single person, who has unlimited liability.

Further reading

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. This means that the owner has no less liability than if they were acting as an individual instead of as a business. It is a "sole" proprietorship in contrast with partnerships.

A sole proprietor may use a trade name or business name other than his or her legal name. In many jurisdictions there are rules to enable the true owner of a business name to be ascertained. In the United States there is generally a requirement to file a doing business as statement with the local authorities. In the United Kingdom the proprietor's name must be displayed on business stationery, in business emails and at business premises, and there are other requirements.

Advantages

There are many advantages of corporations that are described in that article; chiefly they are the ability to raise capital either publicly or privately, to limit the personal liability of the officers and managers, and to limit risk to investors

Disadvantages

Raising capital for a proprietorship is more difficult because 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.

As a business becomes successful, the risks accompanying the business tend to grow. One of the main disadvantages of sole proprietors is unlimited liability where the owner's personal assets can be taken away. This is particularly true for doing or liabilities created by employees; a corporation only partially shields an owner or officer for his own actions according to the principle of piercing the corporate veil. Also, being alone in business, sole proprietors generally lack money which leads to failure. The small size of the business limits the breadth of management skills because there are fewer people working together. As employees generally seek stable employers, small independent businesses that have a high chance of failing have more difficulty attracting skilled people. Lack of continuity. The enterprise may be crippled or terminated if the owner becomes ill or dies. Relative difficulty obtaining long-term financing. Because the enterprise rests exclusively on one person, it often has difficulty raising long-term capital.

References:

  1. Wiktionary. Published under the Creative Commons Attribution/Share-Alike License.



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