The Disadvantages of a Sole Proprietorship

A sole proprietorship is one of the easier and most common forms to start a business. The only requirement of a sole proprietorship is registration as a business if any name other than the owners name is used for the business. The sole proprietorship is an extension of the business owner, not separate from it. Although this form of business is one of the simpler forms of organization there are numerous disadvantages.
One primary disadvantage of a sole proprietorship is that the owner is personally liable for ALL business debts and lawsuits. Meaning a sole proprietorship, i.e., the business owner, can lose personal property (such as their house, cars, jewelry, etc.) and savings to cover business related debts or to cover the costs of lawsuits. The sole proprietor is also responsible for the mistakes made by employees, if any, that can result in lawsuits or loss of income.
A sole proprietorship is also limited in the ability to obtain business financing. Financing for this type of entity structure is usually in the form of personal loans and credit cards because the business is not separate from the owner. Another disadvantage of a sole proprietorship is that it will be dissolved upon the death of the owner meaning this entity structure does not have continuity.
When choosing a business structure think about the future of the the business. Decide what the current and future business goals are for the company. Think about the longevity of the business and the protections afforded by organizing under a different form, such as a Limited Liability Company, S-Corporation or Corporation. Consider the ability to raise capital by adding partners or shareholders.
A sole proprietorship can be started simply by setting up “shop”, but unlimited liability is the main reason you should consider another form of organizational structure. Take into account the long term goals of the company and the protections afford by certain forms of organization. It is best to consult with your CPA or attorney to determine which entity structure makes the most sense for your business.
Ultimately, the owner makes the decision as to which form of organization is best. It is ease and relatively inexpensive to register an LLC, Corporation or S-Corporation with your local Corporation Commission. Visit their website to read the instructions and determine the fees based on the entity type you choose. If you decide you need help, there are many online sites that can help for a small fee.

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