Sole Proprietorship
CHAPTER FOUR SOLE PROPRIETORSHIP
I.
INTRODUCTION
The sole proprietorship is the simplest form of “business association” we will examine. It is perhaps a bit odd to describe it as a form of “association” given that the “sole” proprietor will be the only “equity” investor and thus doesn’t “associate” with anyone else as a co-equity investor. However, there will almost invariably be “associations” that the sole proprietor will have in order to carry on the business. These can include associations with employees, agents, lenders (such as a bank) and trade creditors. This chapter looks at the structure of the sole proprietorship, its formation, legal status, name registration requirements, funding, management, and dissolution. It also briefly notes why one might want to use this form of business association to carry on a business.
II.
STRUCTURE
Objectives: Closed Book Be able to: (i) Briefly describe the legal structure of the sole proprietorship. (ii) Explain the potential for the management structure to become quite complex.
The legal structure of the sole proprietorship is very simple. The sole proprietor owns the assets of the business and is the ultimate decision-maker. However, a sole proprietorship management structure can, in practice, be very complex. The sole proprietorship business could, at least theoretically, grow to become very large and the sole proprietor could hire several managers to manage various aspects of the business. Each of these managers might be given authority to engage others to assist in doing the required work. A quite complex hierarchy could develop. The apex of the hierarchy would, however, continue to be the sole proprietor (even though the sole proprietor’s decision-making capacity might, as we shall see, be constrained).
44
Notes on Business Associations © Mark Gillen FORMATION
III.
Objective: Be able to explain how a sole proprietorship is formed.
The formation of a sole proprietorship is very simple. Other than
I.
INTRODUCTION
The sole proprietorship is the simplest form of “business association” we will examine. It is perhaps a bit odd to describe it as a form of “association” given that the “sole” proprietor will be the only “equity” investor and thus doesn’t “associate” with anyone else as a co-equity investor. However, there will almost invariably be “associations” that the sole proprietor will have in order to carry on the business. These can include associations with employees, agents, lenders (such as a bank) and trade creditors. This chapter looks at the structure of the sole proprietorship, its formation, legal status, name registration requirements, funding, management, and dissolution. It also briefly notes why one might want to use this form of business association to carry on a business.
II.
STRUCTURE
Objectives: Closed Book Be able to: (i) Briefly describe the legal structure of the sole proprietorship. (ii) Explain the potential for the management structure to become quite complex.
The legal structure of the sole proprietorship is very simple. The sole proprietor owns the assets of the business and is the ultimate decision-maker. However, a sole proprietorship management structure can, in practice, be very complex. The sole proprietorship business could, at least theoretically, grow to become very large and the sole proprietor could hire several managers to manage various aspects of the business. Each of these managers might be given authority to engage others to assist in doing the required work. A quite complex hierarchy could develop. The apex of the hierarchy would, however, continue to be the sole proprietor (even though the sole proprietor’s decision-making capacity might, as we shall see, be constrained).
44
Notes on Business Associations © Mark Gillen FORMATION
III.
Objective: Be able to explain how a sole proprietorship is formed.
The formation of a sole proprietorship is very simple. Other than