Fairfield Institute of Management and Technology

Project on:

Sole proprietorship
Subject: Business Studies

Sub code:110

Submitted to: Submitted by:

Mr.Kawaljeet Singh Rousha n Raj

Assistant Profesor,FIMT 01751488819

2nd sem B.COM(H)

Table of content:
Introduction 1 to 3

Characteristics of Sole Proprietorship 3 to 4

5
Merits of Sole Proprietorship

Demerits of sole proprietorship 6

How a Sole Proprietorship Differs from Other 7 to 8

Business Types
Features 8

Biblography 9
INTODUCTION
The sole proprietorship is the simplest business form under which one can operate a
business. The sole proprietorship is not a legal entity. It simply refers to a person who
owns the business and is personally responsible for its debts. A sole proprietorship can
operate under the name of its owner or it can do business under a fictitious name, such as
Nancy's Nail Salon. The fictitious name is simply a trade name--it does not create a legal
entity separate from the sole proprietor owner.

The sole proprietorship is a popular business form due to its simplicity, ease of setup, and
nominal cost. A sole proprietor need only register his or her name and secure local licenses,
and the sole proprietor is ready for business. A distinct disadvantage, however, is that the
owner of a sole proprietorship remains personally liable for all the business's debts. So, if a
sole proprietor business runs into financial trouble, creditors can bring lawsuits against the
business owner. If such suits are successful, the owner will have to pay the business debts
with his or her own money.

➢ The owner of a sole proprietorship typically signs contracts in his or her own name,
because the sole proprietorship has no separate identity under the law. The sole
proprietor owner will typically have customers write checks in the owner's name,
even if the business uses a fictitious name. Sole proprietor owners can, and often do,
commingle personal and business property and funds, something that partnerships,
LLCs and corporations cannot do. Sole proprietorships often have their bank
accounts in the name of the owner. Sole proprietors need not observe formalities
such as voting and meetings associated with the more complex business forms. Sole
proprietorships can bring lawsuits (and can be sued) using the name of the sole
proprietor owner. Many businesses begin as sole proprietorships and graduate to
more complex business forms as the business develops.
➢ Because a sole proprietorship is indistinguishable from its owner, sole
proprietorship taxation is quite simple. The income earned by a sole proprietorship
is income earned by its owner. A sole proprietor reports the sole proprietorship
income and/or losses and expenses by filling out and filing a Schedule C, along with
the standard Form 1040. Your profits and losses are first recorded on a tax form
called Schedule C, which is filed along with your 1040. Then the "bottom-line
amount" from Schedule C is transferred to your personal tax return. This aspect is
attractive because business losses you suffer may offset income earned from other
sources.
➢ As a sole proprietor, you must also file a Schedule SE with Form 1040. You use
Schedule SE to calculate how much self-employment tax you owe. You need not pay
unemployment tax on yourself, although you must pay unemployment tax on any
employees of the business. Of course, you won't enjoy unemployment benefits
should the business suffer.
➢ Sole proprietors are personally liable for all debts of a sole proprietorship business.
Let's examine this more closely because the potential liability can be alarming.
 ➢ Imagine an even worse scenario: The sole proprietor (or even one her employees) is
involved in a business-related accident in which someone is injured or killed. The
resulting negligence case can be brought against the sole proprietor owner and
against her personal assets, such as her bank account, her retirement accounts, and
even her home.

Consider the preceding paragraphs carefully before selecting a sole proprietorship as your
business form. Accidents do happen, and businesses go out of business all the time. Any
sole proprietorship that suffers such an unfortunate circumstance is likely to quickly
become a nightmare for its owner.

If a sole proprietor is wronged by another party, he can bring a lawsuit in his own name.
Conversely, if a corporation or LLC is wronged by another party, the entity must bring its
claim under the name of the company.

❖ The advantages of a sole proprietorship include:

• Owners can establish a sole proprietorship instantly, easily and inexpensively.

• Sole proprietorships carry little, if any, ongoing formalities.
• A sole proprietor need not pay unemployment tax on himself or herself (although he
or she must pay unemployment tax on employees).
• Owners may freely mix business or personal assets.

The disadvantages of a sole proprietorship include:

• Owners are subject to unlimited personal liability for the debts, losses and liabilities
of the business.
• Owners cannot raise capital by selling an interest in the business.
• Sole proprietorships rarely survive the death or incapacity of their owners and so
do not retain value.

❖ Characteristics of Sole Proprietorship

1. Single Ownership: It is a type of business unit, in which a single person owns the entire
business, i.e. all the assets and property belongs to the proprietor. Accordingly, he bears all
the risk associated with the enterprise. Hence, the business ends up at his will or on his
demise.
2. No sharing of Profit and Loss: Whatever income generated from the sole proprietorship
business, it belongs to the sole proprietor only. Consequently, he alone bears all the losses
incurred by the firm. There is no sharing of the business profits and losses.
3. One man’s capital: The capital required to start the business or to continue operations, is
arranged and brought to the business by the sole proprietor only, either from his personal
resources or by borrowing, i.e. from the bank, financial institutions, friends, relatives, etc.
4. Unlimited Liability: This is one of the major con of sole proprietorship business, i.e. the
liabilities are unlimited. In the event of loss, the personal assets of the proprietor along
with the business assets can be utilised to discharge the dues of business.
5. Less Legal Formalities: The legal requirements for formation, operation and closure of a
sole tradership business is almost nil, even it does not need registration. Although for the
purpose of business, it can be registered with local self-government, and obtain a certificate
of registration.
6. One man Control: As only one person is in charge of all the activities, he has full fledged
control over it. Thus, the sole proprietor takes all the decision and execute it, in the manner
he wants.

There is no legal distinction between the proprietor and business; they are one and the
same thing in the eyes of the law. Sole proprietor uses his own skills, intelligence and
expertise to operate the business.

Merits of Sole Proprietorship

▪ Easy formation and closure
▪ Direct motivation
▪ Maintenance of business secrets
▪ Quick decision and prompt action
▪ Better control
▪ Flexibility in operation
▪ Least record keeping
▪ Close personal relation
A sole proprietorship is among the oldest and simplest business forms wherein, only one
man heads the entire show. Some common examples of sole proprietorship business
are grocery shop, chemist shops, beauty parlours, fabrication units and so on.

Demerits of Sole Proprietorship

▪ Limited resources
▪ Limited managerial ability
▪ Lack of continuity
▪ Limited size
▪ Unlimited liability
How a Sole Proprietorship Differs from Other Business Types:

1. Number of Owners

A sole proprietor is a solo business owner. If you are a sole proprietor, you are the only
person who owns your business. A partnership by definition has more than one partner,
and a corporation usually has more than one shareholder. A limited liability company (LLC)
may be owned by just one person (called a single-member LLC), but this business must
register with a state.

2. Control by Owner

A sole proprietor has complete control of his or her company. Since there are no other
owners, and no legal agreement restricting ownership, the sole proprietor can whatever is
necessary to keep the business going. In a partnership or LLC structure, ownership is
designated by an agreement (Partnership agreement or LLC operations agreement). In a
corporation, control over the company rests with the board of directors, of which body the
original owner has only partial control (even if he/she has a controlling interest.

3. Startup of the Business

A sole proprietor business is the easiest to start. You don't need to register the business
with your state or have a board of directors or operating documents (like a

Starting a sole proprietorship means opening a business bank account, maybe filing a
fictitious name statement with your city or county.

4.Tax and Legal Status

A sole proprietor is unique because nothing is needed to form this business type. If you
want to be a sole proprietor, you just start your business. No legal documents need to be
filed.

A sole proprietorship files taxes on Schedule C of the owner's personal tax return and the
income from the sole prop is taxed at the owner's personal rate. A single-member LLC may
be taxed as a sole prop, while a multiple-member LLC is taxed as a partnership. Partnership
income is taxed to the partners at their personal tax rates. Finally, the owner (shareholder0
of a corporation is taxed on any distribution from the company and on dividends paid to
the shareholders; the corporation pays taxes at the corporate rate.

5. Liability of the Owner

As noted above, the sole proprietor is liable personally for the debts of the business and for
negligence and other personal liability. In the LLC and corporate forms of business, the
liability of the owner is limited to the owner's investment.
 The salient features of sole proprietorship form of organization are as under:
• Single Ownership. A sole trading concern is owned by one individual. ...
• Personal Organization or Common Identity. ...
• Capital. ...
• Unlimited Liability.
• One Man Control.
• Profits and Losses.
• No Special Legislation.

Features of Sole Proprietorship

1. Single Ownership. A sole trading concern is owned by one individual. It is run entirely
at his risk of loss. The sole trader provides both capital and management to the business.

2. Personal Organization or Common Identity. A sole tradership concern has no

separate legal entity independent of the owner. The owner and the business concern are
one and the same. The owner owns everything the business owns and he owes everything
the business owns.

3. Capital. In sole tradership, the capital is employed by the owner himself from him
personal resources. He may also borrow money form his friends and relatives if he cannot
depend solely on his personal resources.

4. Unlimited Liability. The liability of the proprietor for the debts of the business is
unlimited. The creditors have the right to recover their dues even from the personal
property of the proprietor in case the business assets are not sufficient to pay their debts.

5. One Man Control. Sole tradership is one-man show. The sole trader provides
management to the business. He takes all the decisions, procures material resources,
employs persons and directs and controls the affairs of the enterprise. He is not required to
consult anyone else in taking any decision. Though the sole trader may delegate some of his
authority to his assistants but the ultime authority to manage and control rests with him.

6. Profits and Losses. The surplus arising in the business of the sole trader entirely
belongs to him and similarly all the business losses and risk are to be borne by him alone.
 BIBLOGRAPHY

Name of the book Author

Business Studies Alka Gawal

Reference:

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