Topics: Corporation, Types of companies, Business law Pages: 8 (1955 words) Published: November 27, 2014

(University of the City of Manila)
Intramuros, Manila



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A business is an organization that uses economic resources or input to provide goods or services to customers in exchange for money or other goods and services. After deciding to start a business, one of the most important issues is the form of business entity that will serve as the vehicle in pursuing the business that will affect the company’s and owner’s legal liability and income tax treatment. The three most common legal forms of business organization are the sole proprietorship, partnership and corporation.


Sole proprietorship is a business owned and operated by an individual for his or her own profit. It is considered as the most common form of business ownership. Typically, the proprietor along with a few employees operates the proprietorship. He or she normally raises capital from personal resources or by borrowing and is responsible for all business decisions. The sole proprietor has unlimited liability meaning his or her total wealth not merely the amount originally invested can be taken to satisfy the creditors in case of dissolution. Majority of sole proprietors are found in service, wholesale or retail industry. Typical examples of sole proprietorship are bike shop, computer shop, sari-sari store or grocery, personal trainer or plumber. The following are the characteristics of a sole proprietorship: 1. As to ownership and management, the single owner has the sole responsibility of managing the affairs, assets and liabilities of the business for its growth and failure. The proprietor and his business are considered one, which means that assets and liabilities of the business and of the owner are combined without distinction in case of dissolution of the proprietorship. 2. As to capitalization, the capital of the business emanates from personal resources of the proprietor or from borrowings. 3. As to risks, the proprietor or owner bears all the risks. 4. As to liability, the proprietor has unlimited liability meaning in case of dissolution, to satisfy the creditors as to their loan exposures, they can run after not only the proprietor’s business but also to his personal belongings. 5. Sole Proprietorship is not ideal for high risk businesses.

Sole proprietorship creation has pros and cons. Among the advantages of sole proprietorship are: 1. Creating one is easy and inexpensive.
2. The owner maintains complete control of the business and retains all the profits. 3. Business losses can be deducted against the sole proprietors other sources of income, can be deducted against the owner’s personal tax return 4. It is not subject to double taxation - For tax purposes, the profit or loss of the business flows through to the owner’s personal tax return document, since it is not a separate legal entity. 5. The business is easy to dissolve - ends at the owner’s death or loss of interest in the business

On the other hand the disadvantages of sole proprietorship are: 1. Liability on the owner’s part is unlimited - The sole proprietor is responsible for all the liabilities of the business, and this is a significant drawback. If a sole proprietors business is sued, the owner could theoretically lose all the business’s assets along with personal assets. 2. The business relies on the skills and abilities of a single owner to be successful. Of course, the owner can hire employees who have additional skills and abilities. 3. Raising capital can be difficult - because the ownership of the business cannot be shared. 4. The business ends at the owner’s death or loss of interest in the business. 5. The liquidity of the owner’s investment is low. Liquidity is the ability to sell a business or other asset...
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