Which Two Sentences Describe the Characteristics of a Sole Proprietorship?

A sole proprietorship is a type of business owned and operated by one individual, where there is no legal distinction between the owner and the business. Here are two sentences that describe its characteristics:

1. A sole proprietorship is the simplest and most common form of business ownership, where the owner has full control over all business decisions and operations.
   • In this structure, the owner makes all decisions without requiring approval from partners, shareholders, or a board. This allows for flexibility and direct management, which can be beneficial for small-scale or personal ventures.
   • Example: A freelance graphic designer running their own business is a sole proprietor.
2. The owner of a sole proprietorship is personally liable for all debts and obligations of the business, meaning there is no separation between personal and business assets.
   • If the business incurs debt or is sued, the owner’s personal assets (such as a house or savings) can be used to satisfy those obligations.
   • Example: If a sole proprietor running a bakery faces a lawsuit due to an accident on the premises, the owner’s personal wealth could be at risk.

Here are additional key characteristics of a sole proprietorship:

1. Ease of Formation and Low Cost:

   • Starting a sole proprietorship is simple and inexpensive compared to other business structures. There are typically fewer legal formalities and no need to register the business as a separate entity.
   • Example: A person starting a lawn care service only needs a business license or permit in some locations.

2. Single Ownership and Management:

   • The business is owned and operated by a single individual who retains full decision-making power.
   • Example: A boutique owned and run by one individual reflects this characteristic.

3. Direct Claim to Profits:

   • The owner keeps all profits generated by the business after taxes. There are no shareholders or partners to share the income.
   • Example: A sole proprietor of a coffee shop earns all the profit directly without sharing it.

4. Unlimited Liability:

   • The owner is personally liable for all debts and obligations of the business. This risk can extend to personal assets.
   • Example: If the sole proprietorship cannot repay a loan, the lender may claim the owner’s personal property.

5. Limited Lifespan:

   • The business’s existence is tied to the owner. It ceases to exist if the owner retires, becomes incapacitated, or passes away.
   • Example: A tailor shop owned by a single individual would close upon the owner’s retirement unless transferred to someone else.

6. Minimal Regulatory Requirements:

   • Sole proprietorships generally have fewer regulatory and tax obligations than corporations or partnerships.
   • Example: They often require simpler tax filings and financial statements.