Organizational Structure of Sole Proprietorship

A sole proprietorship has a simple organizational structure; it is are 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.

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.

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.

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.

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.