When starting a business, you will need to decide what type of company you want it to be. There are pros and cons to each type, and you may think running a sole proprietorship would be ideal. After all, it is one of the simplest organizations to set up, and it comes with much simpler tax rules. However, you may want to think twice before setting up a business in this manner.
Essentially, running a sole proprietorship means there is no legal distinction between you and the company. This makes you more liable if the business ever goes under. Deciding on the best business formation is of the utmost importance, and here are several reasons not to opt for an SP.
You may lose tax benefits
When you form a limited liability company or another type of corporation, you receive various benefits when it comes to filing taxes. It may make filing every year more complicated, but you can end up saving much more money. You may end up spending more than you have to on taxes with a sole proprietorship.
The business ends when you go
If you want to one day pass your business on to someone else, then you should form your company as something other than an SP. You and the business are one in the same, so if you pass away, then the business ends.
There are greater liability risks
With a sole proprietorship, there is no distinction between you and the business. This means your business and personal assets become intertwined. If your business racks up debt, then you may need to sell your personal assets to compensate for the loss. Under other business types, if your company has to file bankruptcy, you do not have to worry about losing your personal assets, such as your house and car, in the court proceedings. Similar protections are not available under a sole proprietorship.