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Why you shouldnʼt own a business as a sole proprietor?

| Jun 1, 2021 | business formation & planning |

Many individuals looking to test the waters with their business concept opt to operate as sole proprietors. It avoids them having to go through the incorporation process, which involves paying state registration fees and holding annual meetings as required by Kentucky’s Secretary of State.

While many people choose to operate their business as a sole proprietorship because of the ease with which they can set it up and run it, there are some downsides to this entity structure. You may want to weigh those factors before making an ultimate decision as to whether to set up a sole proprietorship or continue operating as such.

Taxation

Many business owners default to setting up a limited liability company (LLC) or similar corporations because they afford them pass-through tax-filing status. Data compiled by the personal finance website Nav captures how sole proprietorships are five times more likely to face tax audits than any other corporate structure.

Liability issues

LLCs also provide liability protection that keeps personal assets out of reach of potential creditors. Plaintiffs’ attorneys often appreciate when they find out that a business owner is operating as a sole proprietor instead of as an LLC because they know how easy it is to stake a claim to business owners’ assets if only the former exists.

Terminal vs. perpetual existence

Another downside to operating as a sole practitioner is how long these two entities last. A sole proprietorship dies when you pass away. You can sell off another type of corporation, such as an LLC, to others, thus allowing it to live on forever.

An ability to build credit

Sole proprietors operate their company as themselves. This means that owners don’t qualify for any additional credit cards or loans for their business that they might have received if they had an LLC in place.

Corporate structures add an air of professionalism

Customers and investors notice the acronym behind your company’s name. It sends a message to some as to how serious you are about your operation. You don’t have this if all you’re operating is a sole proprietorship.

How to proceed in selecting a corporate structure for your Louisville company

You have options when it comes to different entity structures to choose from, each with their own pros and cons. A business formation attorney can walk you through the different options so you can decide what’s best for you.