Sole proprietorships are unincorporated businesses owned and run by one individual. They have some key advantages, including easy formation without much legal complexity, favorable tax treatment where business profits pass through to the owner's personal tax return, and full control and decision making power resting with the sole proprietor. However, sole proprietorships also involve unlimited personal liability for the owner, where they are personally responsible for all business debts and losses. They also have difficulties raising capital and lack continuity, being unable to survive the owner's departure.

1. CATHOLIC UNIVERSITY OF EASTERN AFRICA
(GABA CAMPUS)
UNIT CODE: CAC 111
UNIT TITLE: BASIC ACCOUNTING
UNIT LECTURER: Mrs Adero
Group 1 Students
Ken Kirui : BCOM/GC/1016/14/15
Sandra Wafula : BCOM/GC/1035/13/14
Victor Ngara : BCOM/GC/1028/14/15
Mohamed Osman: BCOM/GC/1037/14/15
QUESTION: Discuss sole proprietorship?

2. Introduction to sole proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type
of business entity that is owned and run by one natural person and in which there is no legal
distinction between the owner and the business. The owner is in direct control of all elements
and is legally accountable for the finances of such business and this may include debts, loans,
loss etc.
The owner receives all profits (subject to taxation specific to the business) and has unlimited
responsibility for all losses and debts. Every asset of the business is owned by the proprietor
and all debts of the business are the proprietor's. It is a "sole" proprietorship in contrast with
partnerships (which have at least 2 owners).
A sole proprietor may use a trade name or business name other than his, her or its legal name.
They will have to legally trademark their business name, the process being different
depending upon country of residence.
Characteristics of sole proprietorship
1. The business is owned and controlled by only one person.
2. The risk is borne by a single person and hence he derives the total benefit.
3. The liability of the owner of the business is unlimited. It means that his personal assets
are also liable to be attached for the payment of the liabilities of the business.
4. The business firmhas no separate legal entity apart from that of the proprietor, and so
the business lacks perpetuity.
5. To set up sole proprietorship, no legal formalities are necessary, but there may be legal
restrictions on the setting up of particular type of business.
Advantages of sole proprietorship
There are many reasons why a person would choose to start their business up using a sole
proprietorship structure. Some of the main advantages of sole proprietorships include:
1. Ease of formation: Starting a sole proprietorship is much less complicated than starting a
formal corporation, and also much cheaper. Some states allow sole proprietorships to be
formed without the double taxation standards applicable to most corporations. The
proprietorship can be named after the owner, or a fictitious name can be used to enhance the
business’ marketing.
2. Tax benefits: The owner of a sole proprietorship is not required to file a separate business
tax report. Instead, they will list business information and figures within their individual tax

3. return. This can save additional costs on accounting and tax filing. The business will be taxed
at the rates applied to personal income, not corporate tax rates.
3.Employment: Sole proprietorships can hire employees. This can lead to many of the
benefits associated with job creation, such as tax breaks. Also, spouses of the business owner
can be employed without having to be formally declared as an employee. Married couples
can also start a sole proprietorship, though liability can only assumed by one individual.
4.Decision making: Control over all business decisions remains in the hands of the owner.
The owner can also fully transfer the sole proprietorship at any time as they deem necessary.
5. Product change - Anindependentbusinesscanmake changesintermsof productsinorderto
benefitthemselvesaswell astheircustomers.Anexample of thiscouldbe abetterline of products
to replace a notso well existing line.Franchise basedbusinesseshoweverdon'talwayshave this
freedomasthere are more people involvedinthe decision-makingprocess
6. Bettercustomerrelations - Whenoperatingasmallerbusiness,customerrelationsbecome more
valuable andsustainasthe customeristhe one whoisprimarilykeepingthe businessalive,itis
critical as an independentthatthe customerrelationsare of goodvolume.
Disadvantagesof sole proprietorship
1. Financial risk – The financial sources required to sustain a business can be substantial.
Proprietors tend to commit most of their savings or even falling into debt in order to begin. If
things don’t go well, the proprietor may face substantial financial loss. Also, there is no
guaranteed income to begin with. There might be times, especially in the first few years,
when the business is not generating enough profit for the proprietor to live on.
2. Less control over employees – While employees are able to direct the overall outcome of
the work, the proprietor has control over how to complete the task, including the tools and
processes used. You must be willing to give up this control, something some of us business
owners have trouble doing, because failing to do so may mean the IRS re-classifies your
worker as an employee and imposes penalties.
3. High commitment – When owning an independent business, it can take time for the
business to become fully established and for it to make a sufficient profit in order to meet the
needs of the proprietor as well as the employees. This means being committed to the business
at all times in order for it to work.
4. Competition – Independent businesses often face competition with local independents
which means having to price agree on items in order to share custom. Sometimes however,
custom can be taken from one independent to another due to substantial price changes, the
quality of products and also customer service.
5. Liability : The business owner will be held directly responsible for any losses, debts, or
violations coming from the business. For example if the business must pay any debts, these
will be satisfied from the owner’s own personal funds. The owner could be sued for any
unlawful acts committed by the employees. This is drastically different from corporations,

4. wherein the members enjoy limited liability (i.e., they cannot be held liable for losses or
violations)
6. Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that
the owner must pay self-employment taxes. Also, some tax benefits may not be deductible,
such as health insurance premiums for employees
7. lack of “continuity”: The business does not continue if the owner becomes deceased or
incapacitated, since they are treated as one and the same. Upon the owner’s death, the
business is liquidated and becomes part of the owner’s personal estate, to be distributed to
beneficiaries. This can result in heavy tax consequences on beneficiaries due to inheritance
taxes and estate taxes
Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can
be difficult to generate capital. Sole proprietorships do not issue stocks or other money-
generating investments like corporations do .
Conclusion
Sole Proprietorship- Sole proprietorships are the most common form of business in today’s
world. These are your mom and pop shops built from the ground up and owned by one
person. Sole proprietorships are unincorporated so any contract or legal agreement the
company agrees to, it is actually the owner that is entering into the contract. Being a sole
proprietor has obvious advantages in that it is very easy to create a sole proprietorship and
and all profits made by the business belong to the business owner. All business decisions and
actions are also controlled by the owner. However, there are key disadvantages of a sole
proprietorship. The most obvious is that a sole proprietorship can only have one owner with
no possibility of having a partner if the business ever expands.

5. CONTENT
. Introduction to sole proprietorship
. Characteristics of sole proprietorship
. Advantages of sole proprietorship
. Disadvantages of sole proprietorship