This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The first of the three basic forms of business organization - the sole proprietorship - is the simplest and is even yet the most numerous. Small shops, farms, professional activities, and the like, are usually owned and conducted by one man. The owner does not separate his ownership of the business from his management of it; he does not even separate the ordinary management of his business affairs and the management of his personal affairs. He, himself, is the business and the business is a part of him.
The simplicity of this form does not necessarily imply, however, that it is applicable only to a small business. Many men of great wealth could properly regard the investment and management of their funds as itself a business, for this work alone sometimes requires the services of a force of assistants, bookkeepers, and clerks. Then, again, an individual may embark upon a business enterprise which grows rapidly from year to year and becomes very extensive; yet the original proprietor may continue to own and direct it all. This was the case, for instance, up to a few years ago with the great department stores in Philadelphia and New York which were personally owned and managed by Mr. John Wanamaker. However, it usually happens that a business which is becoming large and prosperous finds the single proprietorship undesirable.
The sole proprietorship has a real advantage in the ease with which a business may be started in this form, and a slight economy due to the absence of all legal agreements. A forceful man can often, by reason of his freedom from any restraint, make rapid growth under this form. A young man who starts his own business in his own name learns business management as the business grows, masters the difficulties of financial problems as he solves them, and becomes an all-round business man, with initiative, ability, and resourcefulness, by the natural evolution incident to his situation. Many of the biggest businesses and very many of the biggest business men in this country have developed along the lines of sole proprietorship.
Its chief disadvantages are three in number. First, the Capital Of the business is limited to whatever the owner possesses or can borrow. Some kinds of businesses, if they grow at all, will finance themselves, so that there will never be need for any more capital than was devoted to the business at the start; but the great majority of business concerns which are expanding require fresh capital.
A second and even more serious disadvantage is the strict limitation on the management of the business. The owner must depend for all executive work either solely upon his own efforts or in part upon the efforts of men whom he engages at a fixed salary. Men of real executive ability ordinarily prefer to go with concerns in which they themselves have an interest in the business. If the individual owner wishes to secure the services of these men, the salaries he pays must be exceptionally high. To refer again to the case of John Wanamaker, it is reported that when he was getting started in Philadelphia, there were at least a dozen of his employees who were drawing much larger incomes from the business than was the proprietor himself.
The third disadvantage, as compared at least with the corporation, is the ever-present personal liability of the owner for all the debts of his business. He cannot legally separate his personal property from that devoted to his business.