Agriculture Reference
In-Depth Information
unlimited liability. The owner's liability does not stop with business assets; it also extends
to personal assets. Such assets can be, and often are, used to satisfy fi nancial obligations.
Thus, if Fragrant Floral starts losing money, and the bank demands payment on a loan made
to the business, Jessica Alverson is personally liable for the payment of the loan. If the busi-
ness cannot cover the loan, the bank can typically demand payment from Jessica's personal
savings and investments, or other assets she owns.
Another important disadvantage relates to the generally limited amount of capital funds
that one person can contribute. Lenders are also somewhat reluctant to lend to an individual
owner unless the owner's personal equity can guarantee the loan. Proprietorships often fi nd
that they are starved for capital, and this serious disadvantage may do more than stunt growth.
Thousands of bankruptcies each year can be traced to a serious shortage of capital when a
business is started.
While freedom from business taxes is generally an advantage, it may also be a disadvan-
tage. Since business profi t in a proprietorship is considered personal income to the owner, a
high business profi t may throw the owner into a higher tax bracket than would the corporate
form of business organization. This is especially disadvantageous if extensive funds are
needed for the growth and expansion of the business. Corporate tax rates along with other
tax regulations may provide an advantage in such cases.
The concentration of control and profi ts in one individual may also be a disadvantage.
Many highly trained and motivated employees want to participate fi nancially in the business
where they work (i.e., they may have a desire to own a portion of the business). They may
also be uneasy about the fact that their futures depend on the health and viability of a single
person. Thus, proprietorships may experience some diffi culty in hiring and keeping good
people. Without good, highly motivated employees, the owner may fi nd as the business
grows—that he or she is “wearing too many hats”—with the end result that the business
suffers.
Finally, the proprietorship lacks stability and continuity because it depends so heavily on
one person. The death or disability of that one person, in effect, ends the business.
Proprietorships may be diffi cult to sell or to pass on to heirs. This is particularly true if they
become sizeable businesses. Individual shares or parts of the business cannot be parceled out
to several individual owners or to heirs in the same way that shares of a corporation can.
For example, Molly's Steakhouse was a regionally noted restaurant in a small Midwest
town. Molly established and managed this business profi tably for roughly 30 years. However,
Molly was always in charge of everything: food ordering and preparation, tabulating the
bill, and collecting money. Food servers had few responsibilities, and turnover among
employees was high. Molly refused to bring any family members into the business. But, the
food was excellent, and Molly had a very good business, though it remained quite small
because she “just couldn't work any more hours.” Then, Molly was hospitalized and had
a lengthy recovery period. As a result, Molly simply closed the doors and her restaurant
went out of business. Some planning and forethought on Molly's part could have averted the
closing of this small, but profi table proprietorship.
Partnerships
A
partnership
is the association of two or more people as owners of a business. There is no
limit to the number of people who may join a partnership. Apart from the fact that a partner-
ship involves more than one person, it is similar to the proprietorship. Partnerships can be
based upon written or oral agreements, or on formal contracts between the parties involved.
