Sole proprietorship: structure, advantages, and disadvantages

Sole Proprietorship Before Referencing

Family business structures

In businesses that involve numerous members of the same family, the preferred business choice of conduct is the partnership. What advantages may occur for the family members by conducting business in this form?

One of the advantages of constructing a joint proprietorship or partnership for a family business is that unlike a sole proprietorship, liability is divided equally between all family members.In other words, if the business should fail, no single individual is solely responsible for all of the financial obligations incurred by the business. Individuals in a joint proprietorship are only as liable under the law in proportion to their ownership or investment in the business. This enables certain members of the family to be more responsible for the actions of the business than other members.

For example, through the construction of a limited as opposed to a general or equal partnership, the elderly widow of the now-deceased founder can still have a say and a share of running the business, but will not be as liable for the actions of the business as, say, her oldest son, who has taken over the running of the business after his father's death. "In a partnership, the assets used in the company are generally jointly owned by two or more parties, and the parties agree to share the profits, losses, assets and liabilities in proportion to their equity in the partnership, unless specified otherwise in the partnership agreement" (Sherman, 2005, "Partnership")

Unlike a corporation, however, a family can still exert control over the business, as they alone own the business, rather than outside shareholders. Since a corporation is legally a 'person,' owned by shareholders that elect the board of directors, if many shareholders who are not members of the company purchase shares of the company, the enterprise could no longer be characterized as a family business at all, and its original mission and purpose could become diluted by the interests of outsiders. The family-owned corporation could also be bought out by a larger corporation, and lose its family characteristics. Corporations are also much more legally complex to run. They must keep minutes of their meetings for shareholders, and they are also taxed 'twice' -- in other words, the income of the corporation's board of directors and shareholders are taxed, as well as the corporation itself as a legal, fictive person.

Can you think of any potential problems that may occur when family members conduct business in the form of a partnership?

However, that does not mean that a partnership is always an ideal arrangement. A family is often rife with emotional as well as business conflicts, and these impulses can become intertwined a way that is neither good for business nor for good family relations. One member of the business might marry and allow his or her spouse to become part of the partnership, and then get divorced. What happens to the divorced spouse's share in the business? Does he continue to work for the business even if he dislikes his former wife? Or, a son could take over from a father because of family custom, but not have his father's expertise. Family tradition might override better judgment when selecting individuals to be in authority.

Would the other business entities of sole proprietorship or incorporation fair any better? Explain your reasons.

The danger of a sole proprietorship is that it places the liability of the enterprise only on the shoulders one family member. This could be extremely unfair, if all of the members of the family are involved to some degree, as it would mean that one individual's assets would be at risk, and no one else would stand to lose, personally, if the business failed. This situation could cause more family conflict than even a failure of a joint proprietorship. "A proprietor is personally responsible for all business liabilities and, therefore, creditors may force the proprietor to use personal assets to satisfy the company's debts, although insurance may be available that will limit your liability for business debts....Another significant drawback that becomes relevant if you want to raise capital is that the proprietorship structure significantly inhibits the range of available money-raising strategies because there's no way to share equity, and you'll need to personally guarantee any debt" (Sherman, 2002, "Sole proprietorship").