Page 118 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Unit 8: Setting up a Small Business Enterprise

5. Various Tax Benefits: A final and important advantage to the sole proprietorship is the Notes
various tax benefits available to an individual. The losses or profits of the sole proprietorship
are considered personal to the owner. The losses are directly deductible against any other
income the owner may have and the profits are taxed only once at the marginal rate of the
owner. In many instances, this may have distinct advantages over the method by which
partnerships are taxed or the double taxation of corporations, particularly in the early
stages of the business.

Disadvantages

Following are the disadvantages of sole proprietorship form of business:
1. Risk to the Assets of Sole Owner: Perhaps the most important factor to consider before
choosing this type of business structure is that all of the personal and business assets of the
sole owner are at risk in the sole proprietorship.

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Caution If the demands of the creditors of the business exceed those assets, which were
formally placed in the name of the business, the creditors may reach the personal assets of
the owner of the sole proprietorship.
2. Potential Difficulty in Obtaining Loans: A second major disadvantage to the sole
proprietorship as a form of business structure is the potential difficulty in obtaining
business loans.

Notes Often in starting a small business, there is insufficient guarantee to obtain a loan
and the sole owner must mortgage his or her own house or other personal assets to obtain
the loan.

3. Lack of Continuity: A further disadvantage to a sole proprietorship is the lack of continuity
that is inherent in the business form. If the owner dies, the business ceases to exist. Of
course, the assets and liabilities of the business will pass to the heirs of the owner, but the
expertise and knowledge of how the business was successfully carried on will often die
with the owner. Small sole proprietorships are seldom carried on profitably after the
death of the owner.

8.2.2 Selecting a Business Entity: Joint Partnership

A partnership is a relationship existing between two or more persons who join together to carry
on a trade or business. Each partner contributes money, property, labor, and/or skill to the
partnership and, in return, expects to share in the profits or losses of the business. A partnership
is usually based on a partnership agreement of some type, although the agreement need not be
a formal document. It may even simply be an oral understanding between the partners, although
this is not recommended. A simple joint undertaking to share expenses is not considered a
partnership, nor is a mere co-ownership of property that is maintained and leased or rented. To
be considered a partnership for legal and tax purposes, the following factors are usually
considered:

The partners’ conduct in carrying out provisions of the partnership agreement,
The relationship of the parties,

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