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2 primary risks of owning a business as a sole proprietor

On Behalf of | Sep 30, 2021 | business formation & planning

There are multiple ways for you to structure your new business. You could enter a partnership with another person or even incorporate your business. There are advantages and disadvantages to each of the various business forms.

Many people, by default, end up selecting a sole proprietorship for their business. As you can probably tell from the name, a sole proprietorship involves one person acting as the owner of an unincorporated business. The business is not actually its own legal entity.

Sole proprietorship may be the simplest of all business structures, but that doesn’t necessarily mean it is the right choice for you. What are some of the risks involved in a sole proprietorship?

You are personally responsible for the business’s liabilities

If your business succeeds, you will reap many rewards as the owner regardless of what business structure you use. However, if your business struggles or fails, the wrong business can leave you vulnerable.

As the sole proprietor, you have ultimate financial responsibility for the business’s debts, even if the company goes under. A different business structure would create a layer of separation between you and the company.

Your personal assets or future income could also be at risk if an employee or a consumer files a civil lawsuit against your business.

Your business dies with you

When you start a business, you may want it to be a source of income for your loved ones in the future. However, a company started as a sole proprietorship will usually cease to operate when the owner dies because it is not a separate entity.

Its assets may pass to the beneficiaries of the sole proprietor’s estate, which is another concern. When you hold a business as a sole proprietor, the assets in your business become part of your personal estate. That could trigger estate taxes or leave your business assets vulnerable to claims by medical creditors or even the Kentucky Medicaid estate recovery program.

Creating a more structured business entity will protect you as owner and the business if anything happens to you. Careful consideration of the long-term consequences of your business form can help you make the best decision possible when starting a business.