When starting a business, first it is important to decide on the form of ownership. Each of them has a different internal structure and legal status, sizes, allowed areas of activity, and many other details. All forms of ownership have both advantages and disadvantages, a degree of risk to owners, and certain benefits. Since Carla plans to open a pet outlet and invest only her own money, the most appropriate form of business organization would be a sole proprietorship.
From the given data, it is possible to assume that the business is small and will be operating in a single city. Moreover, Carla does not expect to make any profit for at least two years and to make almost no profit for the first three years. Provided the conditions and the size of the business, a sole proprietorship is the most suitable business organization option for Carla.
Sole proprietorship operates in the field of retail and small-scale wholesale trade. Since it provides services at the local level, this form is ideal for Carla’s pet outlet. Fulfillment of any formalities for registration of a sole proprietorship is not required; the only official document is the tax return. The maintenance of financial records is necessary for tax purposes: business expenses are qualified by law differently from personal ones (Al Mamun & Hasan, 2017). Due to its simplicity, a sole proprietorship business is established without much difficulty. The greatest advantage of this form of ownership is the ease of creation, the limited financial capacity, the absence of a complex decision-making mechanism, a simplified form of accounting, and tax reporting.
While simplicity is a great advantage of this form, its main disadvantage is the personal responsibility of the owner for all the obligations assumed by the enterprise. If the organization is prosecuted, its owner bears unlimited liability (Allen et al., 2021). This means that not only the property of the organization but also the owner’s personal property can be confiscated to settle claims. The founder owns the company and is fully responsible for the property, debts, and other obligations. This, perhaps, can be considered the biggest drawback of a sole proprietorship.
Another major problem can be the difficulty of raising capital. Generally speaking, this form of business organization is not as attractive to lenders as other forms. Besides, certain tax inconveniences arise in the case of a sole proprietorship. Additional payments made by the company, such as health insurance, are not treated as an expense by the US IRS and are therefore not excluded from income when calculating tax base (Allen et al., 2021). Sole proprietors must pay such expenses out of the profits remaining at their disposal after tax. In addition to the aforementioned drawbacks, the transfer of ownership is associated with greater difficulties than with a corporate form. When planning property, no part of the enterprise can be transferred to family members during the lifetime of the owner.
When the business processes have already been built, the channels for attracting customers are working, and the company has taken its small niche in the market, entrepreneurs want to move to a new level. Expanding the business requires revising the business plan, preparing new products, finding and processing new customers, building sales and marketing, and simultaneously reducing operating costs (Okon, 2018). Carla will need new partners to start a real growth program. Any modern market niche intersects with related industries with thousands of invisible but strong ties. Affiliate programs with mutual advertising, joint promotions, and discount programs allow expanding the pool of clients and equally share the costs of attracting new clients between partners.
A sole proprietorship is an oldest and most basic form of doing business. Such a business enterprise belongs to one person who owns all of its assets and is personally liable for all of its obligations. Despite its simplicity, this form of business organization does not provide the flexibility that other forms do. It has advantages and disadvantages, so Carla, as well as other future proprietors, must weigh up all pros and cons of doing this type of business.
References
Allen, W. T., Kraakman, R. H., & Khanna, V. (2021). Commentaries and cases on the law of business organization. Lippincott Williams & Wilkins.
Al Mamun, C. A., & Hasan, M. N. (2017). Factors affecting employee turnover and sound retention strategies in business organization: A conceptual view. Problems and Perspectives in Management, 15(1), 63-71.
Okon, E. O. (2018). Property title, formal credit access and business expansion. International Journal of Marketing Research Innovation, 2(1), 1-15.