Sole proprietorship

Before you read

Key terms

1. Choose the Russian equivalents on the right for the following English words and word combinations on the left.

sole proprietorship forms of ownership loan institution credit standing bankruptcy claim personal asset (assets) liability bank loan operational problems corporate tax (income tax)

формы собственности кредитоспособность заявление о банкротстве налог на прибыль проблемы деловой активности кредитные учреждения банковский заем ответственность личное имущество (активы) частное предпринимательство

2. Match up the terms on the left with their definition on the right.

asset income profit stockholder (shareholders) wage salary dissolution recession

a) money gained in business b) anything owned by a person, a company that has money value and may be sold for debts c) slowing of business and industrial activity d) money received during a given period e) owner of business f) payment (monthly or quarterly) for regular employment g) breaking up bonds, union, partnership h) payment made or received for work or service

Think ahead

If you were to establish a small business such as a restaurant, would you prefer to be the only owner of it? Why?

Text 1.2 Read the text, give a brief characteristics of this type of ownership and list its advantages and disadvantages.

Special Appeal to a Start-up

A sole proprietorship is a business owned by one person. It offers a special appeal to those just starting in business because it provides a form of own­ership where proprietors can own and operate a business for their own profit. Most sole proprietors own and manage businesses such as restaurants, drug stores, corner grocery stores, beauty parlours, construction firms and farms. prop.

Sole proprietorships enjoy many advantages which are the reasons why the sole proprietorship has become the major form of business ownership. Sole proprietorships operate under the simplest tax structure afforded to individuals. Thus, they avoid the often higher and more complex state and corporate taxes. The non-business assets of the sole proprietor are available to creditors if bankruptcy of the proprietorship is declared. Thus, because the owner's personal assets and in­come are evaluated by loan institutions, the credit standings of sole proprietorships are often excellent. Just as easy are the steps required to dissolve a sole proprietorship. The only requirement is to insure that all debts are paid. The sole proprietor is able to decide when to operate, when to take a vacation, and for how long, when to expand or open a new store, which people to hire, what mer­chandise to purchase, and many other planned and on-the-spot decisions. This flex­ibility gives the sole proprietor a wide range of freedom. All after-tax profits are for the sole use of the sole proprietor. This is a real moti­vator, which helps increase the satisfaction of working for oneself. The sole proprietorship offers the most confidential method of operation. Because there are no stockholders and no board of directors, there is no need for annual reports and for routinely sharing information with others. In addition to this finan­cial secrecy, operational secrecy is also provided, which makes it difficult for com­petitors to copy the proprietor's strategies.

Compared to the advantages, there are relatively few disadvantages for a sole pro­prietorship, although the disadvantages that do exist are important. In a sole proprietorship, all assets, both busi­ness and personal, are subject to the claims of business creditors. This condition is called unlimited liability. It is an advantage when a sole proprietor wants a bank loan. But it is a distinct disadvantage, should a sole proprietor claim bankruptcy. In fact, a large percentage of small businesses fail each year, and the owners lose their businesses, including their personal assets, and possibly their pride. Unlimited liability is the main disadvantage of sole proprietorships. A sole proprietorship is not permanent. When the owner dies, the business is auto­matically dissolved. If the business is passed on to family members, a new propri­etorship must be formed. Sickness or a serious accident on the part of the owner could also create operational problems for a sole proprietorship and thus force it into dissolution. In addition, sole proprietorships are very vulnerable during recessions. The sole proprietorship is limited in size to the amount of capital raised by the owner through loans. The lack of capital may also cause operational disadvantages. A sole proprietorship may have to be situated in poorer locations, may not be able to make full payment and may not be able to attract em­ployees. For this reason, a business requiring large amounts of capital should not be organised as a sole proprietorship. In a sole proprietorship, employees are limited in many ways. Wages and salaries are often lower and there is little room for advancement. Therefore, it is common for good employees to work for larger competitors or to start their own business. It is important to remember that having and keeping competent em­ployees is a key to the success of any business.

Most new sole proprietors know the product and service technology of their business but are not competent managers. The sole proprietor must have skills in pricing, buying, promotion, sales, personnel and finance. Larger businesses, whether corporations or partnerships, will have many specialists to make decisions in these areas. Sole proprietors must do everything themselves. Often, they must rely on out­side consultants or seek additional training.

Concept check

1. Who is the sole proprietorship the most appealing to? Why?

2. What spheres of economy are the most attractive to this form of business organisation?

3. Look back at the text and fill in the charts.

4. What skills must a sole proprietor have?

5. Match up the half-sentences on the left with those on the right.

1) The sole proprietorships is usually defined as 2) The proprietor is not required 3) A small business owner might select 4) If the sole trade succeeds 5) The individual proprietor is responsible for 6) The enterprise may be terminated

a) upon illness or death of the owner. b) the sole proprietorships to begin with. c) to share profits with anyone. d) the business which is owned and operated by one person. e) in he can form a partnership or corporation. f) the full amount of business debts.

6. Read each statement and decide whether it is true or false.

1) To establish a sole proprietorship you need a lot of government documents.

2) To set up a sole proprietorship is rather expensive.

3) There are no co-owners or partners to consult in a sole proprietorship.

4) The liability of the sole proprietor extends to all the proprietor’s assets.

5) A sole proprietorship is the most widespread form of a small business organisation.

6) The lack of capital may also cause operational disadvantages.

7) In a sole proprietorship employees have unlimited liability.

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READING III