Sole Proprietorships – Pros and Cons

Forming a new business is an exciting time.  A new business can provide new outlets for your creativity and productivity, as well as providing a bright outlook for your security and that of your family.  Small businesses form the cornerstone of many communities, and help many families achieve their dreams.  When starting your business, you will be faced with many important decisions, including how to organize your business.  Corporations, limited liability companies, sole proprietorships — all are valid choices.  Sole proprietorships can be an excellent choice for a small business just starting out, and the majority of small businesses are held this way.  However, there are some important pros and cons that you should consider before making this selection.

Sole proprietorships are one of the most simple business organizations.  They require very little paperwork to get started, as opposed to an LLC or a corporation, which require specific organization papers to be filed with the state.  Sole proprietorships also allow you to take direct control over your business.  You will not have to consult with partners or board members before making decisions or changing business management styles.  Paying taxes are also likely to be simpler than if you were using a corporation business structure.  As a sole proprietorship, you will own all the assets of the business directly.

Sole proprietorships do have their disadvantages, however.  The most notable is that in a sole proprietorship, you are personally responsible for the business, including its debts.  You personally, not just your business, can be sued for the business’s shortcomings or unpaid debts.  If your business fails, that means that you could also lose your personal assets.  In that same vein, as a sole proprietor, it may be more difficult for you to obtain financing, as you may have fewer assets for the bank to mortgage.  Outside investors are also less likely to invest in sole proprietorships, so opportunities for growth may be severely limited.  Another disadvantage is that if you unexpectedly become incapacitated, your business may fail.  Without you there to run the business and make the operating decisions, it will be difficult for your business to continue on.

If you are forming a business, you should talk to an experienced attorney about which business structure is right for you. We can talk about your goals, your business, and your future.