Final answer:
A sole proprietorship is an individually owned and operated business where the owner bears all the liabilities and enjoys all the profits. A small law firm owned by one lawyer is an example, illustrating the control and responsibility inherent in this business structure. While sole proprietorships offer ease of management and tax advantages, they also pose risks as the owner is subject to unlimited liability.
Step-by-step explanation:
The term sole proprietorship refers to a business structure where the business is owned and operated by a single individual. In essence, this means that the sole proprietor is responsible for all aspects of the business, including any debts and liabilities the business may incur, as well as reaping all the profits. There are several advantages to this type of business ownership, such as ease of formation, direct control over decisions, and not having to pay any special taxes other than income tax on the profits earned.
One way to illustrate a sole proprietorship would be to consider a small law firm that is run by one lawyer, even if the firm employs other staff members. This setup is a classic example because it shows that even though the sole proprietor may have employees, they still maintain full control and liability over the business. Similarly, large private companies such as Cargill, the Mars candy company, or the Bechtel engineering and construction firm, while not sole proprietorships due to their size and organizational structure, demonstrate how a business can start as a sole proprietorship and potentially grow into a significant enterprise over time.
However, sole proprietorships also come with downsides, the most significant being unlimited liability. This means that the owner's personal assets could be at risk if the business accumulates debts or legal responsibilities beyond its ability to pay. The owner needs to manage capital acquisition, employee retention, inventory, and much more, which can be daunting for one person. But for those willing to accept the risks, the sole proprietorship can be a fulfilling and profitable endeavor.