Sole

Proprietorship
Business Ethics

Group 1

Abadingo, Precious Mikee

Aguilar, Maria Andrea

Ami, Raianne Mae

Arevalo, Baby Rish

Bayaborda, Jaden Ross

Bigornia, Primalee

Bulacan, Roselle

Castillo, Liyhanne Heart

Catapang, Ma. Dorothy

Cebebo, Angelica Mae

Corpuz, Shane Kelly

 ABM 12-4

What is Sole Proprietorship?

 A business owned by a single individual is called a sole proprietorship.

 According to L. H. Haney, “The individual entrepreneur ship is the form of
business organization at the head of which stands an individual as the one
who is responsible, who directs its operations and who alone runs the risk of
failure.”
 According to James Stephenson, “A sole trader is a person who carries on
business exclusively by and for himself.”
 According to Dr. John A. Shubin, “Under the sole proprietorship form of
ownership a single individual organises, has title to, and operates the
business in his own name.”
 According to James Lundy, “The proprietorship is an informal type of
business owned by one person.”
 According to Kimball and Kimball, “The individual proprietor is the supreme
judge of all matters pertaining to his business, subject only to the general
laws of the land and to such special legislation as may affect his particular
business.”
 According to S. R. Daver, “A sole trader is a person who carries on business
on his. own that is, without the assistance of a partner. He brings in his own
capital and uses all his labour. He also gets himself assisted by other to
whom he pays a salary by way of remuneration.”
 It is clear from the above definitions that sole proprietorship is a business
started by one person, with his own capital assuming all the risks and
responsibilities arising from the enterprise.

Features of Sole Proprietorship

1. Lack of Legal Formalities

 A sole proprietorship does not have a separate law to govern it. So
there are not many special rules and regulations to follow. It does not
require incorporation or registration of any kind. In most cases, only a
license is required to carry out the desired business.
 And just like in its formation, there is hardly any legal process involved
in its closure. Overall it allows for ease of doing business with
minimum hassles.
2. Liability
 Since there is no separation between the owner and the business, the
liability of the owner is also unlimited. So if the business is unable to
meet its own liabilities, it will fall upon the proprietor to pay them. All of

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 his personal assets (like his car, house, other properties etc) may
have to be sold to meet the liabilities of the business.
3. Risk and Profit
 The owner is the only risk bearer in a sole proprietorship. Since he is
the only one financially invested in the company, he must also bear all
the risk. If the business fails or suffers losses he will be the one
affected.
 However, he also enjoys all the profits from the business. He does not
have to share his profits with any other stakeholders since there are
none. So he must bear the full risk in exchange for enjoying full profits.
4. No Separate Identity
 In legal terms, the business and the owner are one and the same. No
separate legal identity will be bestowed upon the sole proprietorship.
So the owner will be responsible for all the activities and transactions
of the business.
5. Continuity
 Just as we saw above the business and the owner have one identity.
So a sole proprietorship is entirely dependent on its owner. The death,
retirement, bankruptcy. insanity, imprisonment etc will have an effect
on the sole proprietorship. In most of such cases, the proprietorship
will cease to exist and the business will come to an end.
6. Secrecy
 It is also an important characteristic of sole proprietorship. All the
decisions are taken by the proprietor himself. He is in a position to
keep his affairs to himself and maintain perfect secrecy in all matters.
7. Freedom regarding Selection of Business
 A sole trader is at freedom to select any business of his choice. He
has not to depend on others.

Organizational Structure of Sole Proprietorship

A sole proprietorship has a simple organizational structure; it is being owned and

operated by a single individual who has the final say about strategic, financial and
marketing matters. Even if a sole proprietor hires employees, a sole proprietorship is,
in effect, a benevolent dictatorship. The business owner does not have to answer to
anyone regarding decisions about business operations. He only needs to keep
business operations safe and legal and run a business that is profitable enough to
meet its financial obligations.

1. Ownership
A sole proprietorship is owned 100 percent by the single individual
whose name is listed on its business licenses. If he decides to share equity,
he'll have to change his business structure. To do so, he registers his sole
proprietorship with state and local revenue officials as closed and then
creates a new business entity that is either a partnership, an LLC, or a C or
an S corporation. He must do this even if the new business entity will use
the same name and serve the same customers as the old one.

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 2. Decision Making
Decision making in a sole proprietorship is ultimately the responsibility
of the sole owner. Although a shrewd sole proprietor will hire consultants
with knowledge and experience who can help him make sound decisions, in
the end, it is the owner's decision whether to implement any of the
suggestions that his advisers make. A sole proprietor can authorize
employees to make certain types of decisions, typically those with limited
scope such as making inventory purchases. While sole proprietors typically
handle all decision making processes, forming outside committees and
consulting with legal and accounting experts is common practice for
important decisions.
3. Financial Operations
The financial workings of a sole proprietorship are intimately connected
with the owner's personal financial situation. When he applies for business
credit, lending institutions will consider his personal credit and personal
collateral. From the standpoint of the Internal Revenue Service, the net profit
on a sole proprietor's Schedule C tax form reporting profit and loss from
business activities is the same as the owner's income from the business.
When the business fails to make a profit, the capital to supplement its cash
flow often comes directly from the owner's personal bank account. Sole
proprietors are often working under a self-employed business model where
they have the control mix personal accounts with business accounts or
completely separate accounts while maintaining full control and liability.

Financial Obligations

The owner of a sole proprietorship is responsible for all the company's financial
obligations. Creditors will ask him to personally guarantee loans, and he will be
responsible for these loan amounts even if the sole proprietorship is dissolved as a
business. If the business is found liable for hurting an individual, such as if someone
slips and falls in a sole proprietor's storefront, then all his personal financial assets
are at risk when compensating the victim.

Types of Sole Proprietorship

1. Self-Employed Business Owner

 Someone who establishes a business for the purpose of making a
profit is called a self-employed business owner. The owner may
conduct the business on a full-time or part-time basis. Under the self-
employed business owner, there is usually no contractual relationship
between the self-employed owner to its customers, as well as the
relationship does not resemble an employer-employee arrangement.
 An example of a self-employed sole proprietors are people who run a
small retail shop with no or few employees to perform services. Also,

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 someone who buys and sells merchandise online is considered a self-
employed individual or sole proprietor.

2. Independent Contractor

 An independent contractor is similar to a self-employed business owner

but resembles more of an employee. An independent contractor is
hired by an employer to perform services or tasks but has no taxes
withheld from his pay and usually does not receive benefits. Unlike a
typical employee, and independent contractor has freedom to accept or
decline tasks given.
 An independent contractor has much more control regarding his or her
work process than that of an employee. An example of an independent
contractor is a writer who is paid for the final work as opposed to the
effort or methodology that went into creating it.

3. Franchise

 In franchise, the sole proprietor, also called as franchisee, pays a fee to

a franchisor in exchange for the right to use the company brand. A
franchisee is obligated to follow a business model that controls areas
such as marketing, ability to expand, operations, and pricing.
 The franchisee also pays a percentage of the franchise unit's gross
sales to the franchisor royalties. A franchise is usually a good choice
for a person who wants to enter the market with little experience for the
franchisor provides a successful business model as well as operational
and marketing support.

Advantages and Disadvantages

What are the Advantages of Sole Proprietorship?

1. Beginning a sole proprietorship is easy. Unlike other business structures,

starting a sole proprietorship requires less paperwork and time to create a
legal sole proprietorship.

2. It is cheap to start a sole proprietorship. Where other business structures

have increased fees and filings to open for business, sole proprietorships
tend to be affordable models to start and maintain.

3. There are some tax benefits for a sole proprietorship. Instead of the business
having to file its own tax return, sole proprietors claim businesses gains and
losses on their own individual tax return. Also, the sole proprietorship is taxed
using individual income tax rates rather than corporate making it simpler and
cheaper to comply with your tax obligations.

4. Sole proprietors can employ others and grow their business. Sole
proprietorships can hire others and enjoy the tax benefits from doing so.

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 Additionally, spouses of the owner can work for the sole proprietorship
without being declared as an employee.

5. Owners have complete and direct control over all decision making. Because
the owner is the business, the owner makes all decisions for the business
rather than sharing power with a partner or corporate board. This allows
owners the freedom to drive the business in the direction they desire.

What are the Disadvantages of Sole Proprietorship?

1. Owners are fully liable. If business debts become overwhelming, the

individual owner’s finances will be impacted. When a sole proprietorship fails
to pay its debts, the owner’s home, savings, and other individual assets can
be taken to satisfy those debts.

2. Self-employment taxes apply to sole proprietorships. Owners must pay self-

employment taxes on the business income.

3. Business continuity ends with the death or departure of the owner. Because
the owner and the sole proprietorship are one, if the owner dies or becomes
incapacitated then the business dies with them and the money and assets of
the business become part of the individual's estate. The assets and money
are subjected to inheritance taxes and can have a great impact on employees
of the sole proprietorship.

4. Raising capital is difficult. Initial funds of the business are generated by the
owner and raising funds for the business can be hard since they cannot issue
stocks or other investment income. Loans may also be difficult if the owner
does not have enough credit to secure additional money.

Examples of Sole Proprietors

1. Run a Bookkeeping Business

2. Freelance Writers
3. Bakers and Chefs
4. Run a Landscaping Company
5. Offer Tutoring Services
6. Graphic Designers/Artists
7. Provide Home Healthcare
8. Be a Financial Planner
9. Computer Repair Services

Famous business examples

Famous Businesses Of Sole Proprietorship Sole proprietorships are not

necessarily tiny, unknown businesses.

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 In fact, many famous businesses started as sole proprietorships and remained
as such until they grew large enough to require incorporation. Ebay, Kinko’s, J.C.
Penney, WalMart, and Marriott Hotels are some examples of sole proprietorships
that grew into multi-million dollars corporations.

How to Register a Sole Proprietorship in the Philippines

Since the law treats the owner and the business as the same, the sole proprietor
only needs to register his or her name with the Department of Trade and Industry
(DTI) and secure local licenses and permits to commence business operations.

Here’s a step-by-step process for registering a sole proprietorship in the

Philippines:

1. Register a business name with DTI to acquire a DTI Certificate of

Registration;

2. Register with the Barangay Office where the business is going to be located
to acquire a Barangay Certificate of Business Registration;

3. Register with the Mayor’s Office to acquire a Mayor’s Permit; and

4. Register with the Bureau of Internal Revenue (BIR) to acquire a Certificate of

Registration.

Example of sole proprietorship in the Philippines

A sole proprietorship is a business that is owned by a single entity. Some

examples include body shops, restaurants, seamstress shops, and other retail
establishments. Other examples include service industries such as insurance agents,
and skilled trades. These are the some following sole proprietorship businesses in
the Philippines:

1. JFT or otherwise known as JANSON

A furniture shop was established 16th of April 2008.
2. Taxumo inc.
Taxumo is an online tax assistance software that helps small business
owners.
3. Sole destination
Sole Destinations is a member of the Philippine Travel Agencies
Association (PTAA). They offer a wide range of tour package.
4. ERIKAS GARAGE SALE
It entails more items thats includes used clothing, imported and durable
bags in a very affordable prices.

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Taxation

One of the advantages of a sole proprietorship is its simplicity. You do not

separate taxes for your business, you simply report all of your business income and
losses on your personal income tax return. But with that simplicity comes personal
liability for legal judgments, taxes, and debt. You will need to make quarterly tax
payments based on estimates for the year, for which you will be refunded or charged
-- depending on whether you over- or underpaid -- at the regular April 15 federal tax
deadline. You also will need to pay self-employment taxes (since their are no
"payroll" taxes).

As a sole proprietor you must report all business income or losses on your
personal income tax return; the business itself is not taxed separately. (The IRS calls
this “pass-through” taxation, because business profits pass through the business to
be taxed on your personal tax return.)

Filing a tax return

The only difference between reporting income from your sole proprietorship and
reporting wages from a job is that you must list your business’ profit or loss
information on Schedule C (Profit or Loss from a Business), which you will submit to
the IRS along with Form 1040.

You’ll be taxed on all profits of the business — that’s total sales minus expenses
— regardless of how much money you actually withdraw from the business.
Estimated taxes Because you don’t have an employer to withhold income taxes from
your paycheck, it’s your job to set aside enough money to pay taxes on any business
income you bring in over the year.

To do this, you must estimate how much tax you’ll owe at the end of each year
and make quarterly estimated income tax payments to the IRS and, if required, to
your state tax agency.

Self-employment taxes Sole proprietors must make contributions to the Social

Security and Medicare systems; taken together, these contributions are called “self-
employment taxes.”

Self-employment taxes are equivalent to the payroll tax for employees of a

business. But while regular employees make contributions to these two programs
through deductions from their paychecks, sole proprietors must make their
contributions when paying their other income taxes.

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