Sole proprietorship

Sole proprietorship is a form of business entity which is run by an individual known as the sole trader. There may be employees or helpers hired under the owner, but the work is administered only by the head (sole trader).  In a sole proprietorship form of business there is no legal distinction between the owner and the business entity. The sole proprietor enjoys all the profits and bears the losses. He has unlimited liability towards all the losses and debts. It is not registered as a limited liability company or a corporate within a state. He does not pay income tax separately but reports business income or losses on his/her individual income tax return. Examples of sole proprietorship are STD booths, grocery shops.

The advantages enjoyed by the sole trader are that he can run the business in the manner he wants it and also enjoy the profits. He is not legally bound by the law as there are no legal formalities in establishing the business. The sole trader owns all the properties and assets of the business. He has the single ownership and is under one man control. Also the sole proprietor does not have to share his profits. The capital raised by the sole trader is low. He can raise his capital by borrowing it from his relatives, friends, banks and financial institutions or through his personal resources.

The disadvantages that a sole proprietorship faces are that the owner has to bear and is responsible for all the losses of the business. The unlimited liability aspect is the biggest disadvantage. Unlimited liability means that the sole trader is responsible for all the losses incurred and to settle the claim he may not only have to use his assets in the business but also the personal properties like his house etc. His liability is not limited to the amount he brought into the business but everything needed to settle claims and pay off debts.

Questions:

• What is sole proprietorship?
• What is unlimited liability?