Considerations When Using a Sole Proprietorship
...ined. It becomes “difficult to keep personal affairs separate from business” (Sole proprietorship, 2001). As the proprietor, you own and control the business. “From the standpoint of nearly all legal rights and responsibilities, your sole proprietorship business and you, as the proprietor, are considered to be one and the same” (Gessaman, 1996). It becomes difficult to measure financial performance and profitability, when business and personal finances are mingled. “In a sole proprietorship, the owner directs business activities and may supply all management and labor utilized by the business” (Gessaman, 1996). This also means the owner is free to run the business the way he sees fit, without the hassle of having to gain approval from others. All proprietorship debt is payable by the proprietor; in addition, all profits accrue to, and all losses are borne by, the proprietor. Pros and Cons of a Sole Proprietorship The sole proprietorship gains its popularity from the simplicity and flexibility this business form. “A sole proprietorship can be established, modified, bought, sold, or terminated quickly. No business planning or organizational arrangements (bylaws, organizational charter, etc.) are required when a sole proprietorship is established” (Gessaman, 1996). Some permits and licenses are required for your business activities, but beyond that, “public notification or legal assistance is not required to start, terminate, redirect, or modify the business” (Gessaman, 1996). The sole proprietorship has a number of disadvantages. The primary limitation, in some instances, results from the lack of a separate business entity. In other words, some proprietors tend to intermix business and household finances. This non-separation results in everything that the proprietor and family own is at risk. However, non-business assets can be protected in a trust, or other isolating mechanism, if the situation warrants. In some instances, the resource base of the business unit may be so limited that credit availability and capacity to respond to business opportunities can be restricted. The business tends to end with the death of the proprietor unless survivorship is established, and succession is carefully planned. “A succession plan enables the proprietor to outline the events to take place upon his or her death, or inability to work” (Hughs, 2002). Some of the items included in this succession include, taxes and other miscellaneous costs. Since finances are the largest part of a succession plan, “the right way [to make a plan] is really to not engage a lawyer, but to engage a tax attorney” (Hughs, 2002). Business Form Chosen After looking into the many items a person needs to consider when owning a business, it was determined that Joe should continue as a sole proprietorship. With the business form decided, there are some other things that need to be considered. Joe needs to take some time in reconsidering his business operations, and specifically the finances. Any number of things could be done to help him improve his business; however, it was determined that following changes could and should be made: • Make sure he knows who his employees are and their relevant information: o Exact time spent each week working o Where exactly they are working o Any complaints customers have had with the employee • Set up a better billing system for billing his clients, such as: o Send out bills with an exact due date o Add penalty charges for late bills in different increments Ex. 30 days late = $4.00 late fee Ex. 60 days late = $8.00 late fee o Refuse service to a customer who is more than 90 or 120 days late with previous payments • Make sure to pay the businesses bills on t...