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What Are Some Disadvantages of a Sole Proprietorship

lawtrades Sole Proprietorship

Going into business for yourself can be truly empowering. Every major decision affecting your business is yours to make. You can choose to work alone or choose to hire others to assist you. You can set your own hours, hand-pick your clients and/or determine who your customer base will be. Your company’s location, facilities, business model, products/services, advertising and ultimate vision are all up to you. To some, this kind of control over a business enterprise means freedom.

However, there are disadvantages to going into business without any legal partners to assist you. And even if you are set on running your business as a solitary owner, there are disadvantages to structuring your single-owner company as a sole proprietorship.

For a moment, assume that you do not intend to co-own your business alongside anyone else. You can choose to structure your business as a sole proprietorship or a single-member liability company. While a sole proprietorship structure generally features less paperwork and regulation, its potential drawbacks include an inflexible tax structure and a lack of personal liability protections.


Taxes and Liability

If you were to structure your business as a single-member LLC instead of a sole proprietorship, you would gain tax structure flexibility and a personal liability shield. As a single-member LLC, you will be able to choose whether your business is taxed as a sole proprietorship or as a corporation. If taxed as a sole proprietorship, your business obligations and credits will be reflected on your personal return. If taxed as a C-Corporation, your business will be taxed as a distinct legal entity and its financial realities will not be dealt with on your personal return.

In addition, if you opt to form a single-member LLC, you will gain personal liability protection. Practically speaking, this means that if your business suffers losses, incurs debts it cannot meet or is held accountable for wrongdoing, creditors and the courts will generally not be able to touch your personal assets when seeking collections and judgments. If you form a sole proprietorship, your personal assets will remain vulnerable to business-related collections.


Practical Concerns

It is also worth noting that you do have the option to form a partnership or a multi-member LLC, if you so choose to. Partnership structures exist that give some individuals managerial power while only allowing others investment-related ownership powers, if that is an option that appeals to you. In addition, you may want to think ahead to a day when the potentially unforeseen may occur. If you fall ill, become injured, want to retire or pass away, what will happen to your business if you are the only owner? This is a challenge worth contemplating before committing to a legal structure for your company.


Business Formation and Registration Guidance Is Available

Formally registering a new startup or business with the best legal structure for your company can be a confusing process. Whether it is a sole proprietorship, a partnership, a limited liability company or even a corporation, the team at LawTrades can help you to realize your vision. Our legal business formation services are affordable, efficient and experienced, so companies of any size and industry type may benefit from our approach.


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