The Princeton University WordNet Database defines proprietorship as an individually owned business in which the single owner is entitled to all the business’ profits as well as being responsible for all of its liabilities. In North America, this type of business structure is more typically referred to as a “sole proprietorship.” There are a number of identifiable characteristics common to a sole proprietorship.
The primary characteristic of a sole proprietorship is that a single individual owns it. In such a business structure, no separation exists between the business owner and its management. The owner of a sole proprietorship typically acts as the organization’s management and has full control of all business decisions.
An organization’s legal status is another defining characteristic that separates the proprietorship from some other types of business structures. The sole proprietorship is not considered a separate legal entity from the owner. The legal structure of a business determines how an organization is taxed, who is liable for debts and who has the final say in business decisions.
High Risk Level
The third characteristic of proprietorship is identified by the level of personal liability and risk associated with the ownership of the business. In a sole proprietorship, the owner is personally liable for all debts and liabilities of the organization. In such a business structure, the owner is essentially the business, and the business is the owner. The sole proprietorship has the highest level of individual risk for the owner in comparison to other business structures.
Financial aspects, such as how the business is financed and how taxes are paid are another characteristic of proprietorship. In a sole proprietorship, the owner provides all the capital. While the owner can finance or borrow the necessary capital, loans are the sole responsibility of said owner. In addition, the money is considered a loan rather than an investment or purchase of a portion of business ownership by an outside source. Additionally, business income from a sole proprietorship is reported to the IRS on Schedule C of the owner’s personal Form 1040.
Ease of Dissolution
The ease with which an organization can be dissolved is the final characteristic that separates the sole proprietorship from other business structures. In most cases, there are few legal formalities and little cost associated with closing a sole proprietorship. For example, the cost to register the dissolution of a sole proprietorship in Canada is a mere $15 at time of publication. In some cases, depending on the specific location, the dissolution of a sole proprietorship may be as simple as allowing the formal business registration to expire.