3 Different Types Of Businesses – A sole proprietorship is an unregistered business owned and managed by one person. Because the business and owner are not legally separate, it is the simplest form of business structure. It is also known as a sole proprietorship, sole proprietorship, or simply a proprietorship.
The business owner, also known as a proprietor or merchant, conducts business under their legal name. They can also choose to do business under a different name by registering a trade name with their local authority.
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This type of business is the easiest and cheapest form to start. For this reason, it is common among small businesses, freelancers and other self-employed people.
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Although the process varies by jurisdiction, forming a sole proprietorship is generally a simple and inexpensive process, unlike forming a partnership or corporation[1].
Compared to other forms of business, there are very few documents that an owner needs to submit to the local authorities. As a result, owners do not have to wait long before getting a license to operate.
Start-up fees are also low, in line with many government policies that encourage entrepreneurs to take risks and grow the economy by minimizing friction for starting new businesses.
There are very few state rules and regulations specific to landlords. Sole proprietorships must keep proper records, file and pay taxes on business income and other sources of personal income.
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Recordkeeping and tax filing obligations are generally no more complicated than maintaining records for individual tax returns. Because of the time and effort, owners may want to pay for specialized software and consultants to streamline the time spent on management.
Government regulations for larger corporations and public companies, such as financial reporting, require much more management and do not apply to sole proprietorships.
Owners control all aspects of their business, including production, sales, finance, personnel, etc. This degree of freedom is attractive to many entrepreneurs, as company success means personal success.
To be successful, owners must be “good enough” at the various aspects of their business over which they have control.
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While some owners have employees and delegate some of their authority, they are ultimately responsible for all decisions and actions of their business.
There is no legal separation between the owner and the business, so the owner receives 100% of the profits. Although all profits go to the owner, taxes are paid once and owners pay the taxes individually.
Holders must pay personal income tax regularly, for example as part of the annual personal tax return. Tax payments may be more frequent, such as quarterly, depending on local tax rules.
Making regular payments can help an owner keep their tax burden from becoming overwhelming and incurring tax penalties. Tax advisors can help owners estimate taxes so they can set aside enough profit to make mandatory government payments[2].
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There is no legal separation between the owner and the business. As all profits go to the owner, all debts and liabilities belong to the owner.
If the business is unable to meet its obligations, creditors can pursue the owner’s personal assets to recover them.
This responsibility is clearly outlined in legal documents signed with lenders, sometimes called promissory notes. A proprietor does not need to provide a personal guarantee to his sole proprietorship as the two are the same legal entity in the eyes of the law.
Owners invest their own resources when they start the business for themselves. There are limits to their financial resources and the amount of credit they can get when seeking loan relationships.
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Implementing ideas is risky and can be expensive. Maintaining a business can be capital intensive. Certain expenses must be incurred before revenue can be generated. Any credit sales and any cash paid for expenses must be financed with working capital. Equipment and other long-term resources needed for the business must be leased or financed.
If the business needs exceed the resources and financing available to the owners, they must carefully manage working capital and possibly limit the acquisition of fixed assets.
A well-stocked business plan helps owners determine the capital needed to start, maintain and grow the business.
If the owner is unable or unwilling to run the business, the business ceases. An owner may have a family member or trusted employee who can work for a short time in the owner’s place in case of illness or some temporary and unforeseen reason.
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Breakage insurance can cover costs for long-term issues, but these policies can’t complete the work an owner has already undertaken.
Without a separate legal identity, a sole proprietorship cannot easily transfer any intangible assets from one owner to another. In addition to equipment and fixed assets, the value of the business itself is tied to the owner.
To make a sale attractive, an owner must find someone with comparable skills who is willing to buy the goodwill the owner has created. If they can’t find a buyer, the owner can turn the business over to a family member or a trusted employee, if there is one.
The holder must make “good enough” decisions in all business areas. If an owner does not have sufficient knowledge or skills, their decisions may be incorrect. There is a limited amount of time to do things the right way or learn to do everything adequately.
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It can be difficult for individuals to properly manage all aspects of their business. The owner can hire employees, outside help, or get professional advice for parts of the business process.
The owner’s ability to use his own time to earn larger profits to offset the cost of hiring help is a critical factor.
Employees, contractors and other services can be very expensive for such sole proprietorships. The owner’s time must be productive enough to pay the cost of hiring others.
Thank you for reading the CFI’s guide to sole proprietorships. To continue learning and developing your financial analysis skills, we highly recommend the additional CFI resources below:
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Land subdivisions and funeral homes might not be the sexiest small business ideas compared to, say, an internet startup or a local coffee shop. But private companies in those sectors tend to have the healthiest cash flows, according to new data from Sageworks, a Raleigh, N.C.-based financial data firm.
For those looking for new ventures, companies with a track record of stability and solvency may be a good place to start. Sageworks used the highest average current ratios to create a ranking of 12 types of businesses with healthy cash flows for the year ended August 31, 2014. [See list below.]
Cash flow is a leading indicator of financial strength because if a company has enough cash, it is likely to meet its short-term obligations—such as accounts receivable and employee wages—on time.
Sageworks analyst Jenna Weaver says publicly traded companies “have the ability to pay their bills and tend to be cash flow positive on average.” He adds that while these companies aren’t necessarily fun or impressive, it’s useful to understand why some industries or business models are more prone to insolvency than others.
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After estate division and bereavement services, this year’s ranking also includes grocery stores, real estate stores, clothing stores, liquor stores, gas stations, dry cleaning and laundry services, specialty food stores, employment agencies, health and care stores, and investigative and security services.
Land distribution companies divide land into lots to facilitate the sale of the property. Weaver explains that its top ranking may reflect the strong recovery in the real estate and construction market since 2009.
The rest of the results show themes: half of the list represented retail. While giants like Walmart are known to run on a low current ratio due to their ability to quickly turn inventory into cash, small privately held retailers may struggle to predict consumer behavior and may therefore accumulate inventory to meet any unexpected consumer demand. Weaver explains that the ability of these smaller facilities to then turn those inventory levels into receivables and cash requirements plays a big role. He also says that a third of the industries on the list are service-related businesses, which typically have lower or no inventory needs.
While each industry operates in different business cycles and models, brainstorming solid business ideas should always keep solvency in mind.
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“Often, when businesses fail, they fail because of their inability to deal with these conditions