Section 1: Starting a Small Business

Sole Proprietorship

Many businesses are owned by one person. Barbershops, dry-cleaners, beauty salons, television repair businesses, electrical contracting firms, photographic studios, and car garages are examples of businesses that are often a sole proprietorship. Dentists, lawyers, doctors, accountants, and other professional occupations also utilize this type of ownership. A proprietorship can be established simply by beginning to sell a product or by performing a service.

The owner is responsible for all operations and assumes all risks. If the business gets into financial difficulties, the creditors may make a claim against the proprietor's personal financial resources and property. If such a situation should occur, the proprietor cannot escape liability simply by turning over the property to a relative or friend. Such a transfer would be void because its purpose would be to defraud creditors.

Except for acquiring the necessary government permits, proprietorship are very easy to establish and are subject to minimal government interference. The revenue of the business, less expenses, becomes part of the personal income of the owner and is taxed accordingly.

The Advantages of Sole Proprietorship

Why would you want to own a business? What are the benefits of owning a business? Business owners have varied answers in response to these questions. Some of the more common reasons given are to make money, be their own boss, and the personal satisfaction derived from running a successful operation. All of us derive personal satisfaction when we do something that is personally important to us. Business owners in a community are often highly respected and looked to for leadership at the local level. Two main advantages of a sole proprietorship are ease of organization and low start-up costs. Additionally, the owner is able to keep the profits or re-invest them back into the business. The owner also makes all decisions and financial information is kept confidential and is not available to the public.

The Disadvantages of Sole Proprietorship

There are several disadvantages to operating as a sole proprietorship. First of all, it may be challenging for some individuals to acquire enough capital to start a business and keep it going until it begins to show a profit. It can be difficult to fund daily operations. Banks often require collateral , making it difficult to borrow. Collateral gives the lender written permission to take ownership over specified items owned by the borrower if the loan is not repaid. The types of collateral most often used to secure a loan are land, buildings, stocks and bonds, and vehicles; in other words, things that can be easily sold and turned into cash.

The second obstacle that many people face is that they may not have all the necessary skills and experience needed to succeed. They also require a quality product or a specialized service, as well as the ability to sell. They should have a talent for building rapport , respect, and loyalty. They must be able to buy wisely, to keep expenses down, to estimate income and costs accurately, and to manage effectively.

Sole ownership also comes with the burden of a third problem: the owner alone takes all the risks. A new firm simply does not start making a profit overnight; therefore, every proprietor risks failure. A fourth challenge is that of competition. Consumers would not be able to enjoy a wide variety of goods and services if there were no competition. Not only do businesses need to be aware of the products and services that are in demand, they must also be able to supply them more efficiently and effectively than their competitors.

Finally, being self-employed requires being prepared to work long hours. While a typical employee works 40 hours a week, a business owner will likely put in twice that amount.