Exam 28: Types of Business Organizations

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When a business is relatively small and is not diversified, employs relatively few people, has modest profits, and is not likely to expand significantly or require extensive financing in the immediate future, the most appropriate form for doing business may be a sole proprietorship. A sole proprietorship is easier and less costly to start than other forms of business, because few legal forms are involved. The owner is free to make business decisions without consulting others. Taxes are paid on the business's in-come as the owner's personal income.
In a sole proprietorship, the owner and the business are the same. Anyone who creates a business without designating a specific form for its organization is doing business as a sole proprietorship. An advantage of the sole proprietorship is its greater organizational flexibility over other forms of business organization. The owner can operate the enterprise without any formalities. A significant disadvantage of this form of organization, however, is that unlike most other forms of business organization, there are no limits on the liability of the owner for the debts and obligations of the firm. Another dis-advantage of the sole proprietorship form can be the ability of a sole proprietor to raise capital while maintaining control and retaining the same form. This course may be limited chiefly to borrowing funds. Bringing in partners would convert the business to a partnership. Issuing stock would require incorporating or establishing another form of business. Selling the business would sacrifice all control. The only way to obtain additional business capital without accumulating it through business profit is by borrowing funds.